Exposure based on capacity

ABSTRACT

This invention relates to hedge fund indexing in general and methods and systems for constructing and maintaining investable hedge fund indices in particular.

This application claims priority under 35 U.S.C. §119 to U.S.Provisional Patent Application Ser. No. 60/696,499, filed Jul. 1, 2005,and entitled “INDEX REBALANCING”, the entire contents of which arehereby incorporated by reference.

BACKGROUND

Hedge funds have recently become increasingly popular due to theirpotential for generating positive returns in various marketenvironments. Given complexities and operational difficulties ininvesting in unregulated products, such as hedge funds, this developmentled to an increase in popularity of hedge fund indices.

In general, hedge fund indices provide performance benchmarks based on alarge and representative sample of hedge funds. For example, hedge fundindices focus on capturing the average return and risk characteristicsof hedge funds viewed as an asset class, rather than attempting tooutperform the asset class by choosing better performing hedge funds forthe index.

The index is published on a predetermined (e.g., monthly) basis andrepresent the weighted average performance of hedge funds included inthe hedge fund index. The performance can be calculated and publishedfor the overall index, as well as for various subsets of the overallindex as defined, for example, by an investment strategy, geographicallocation, assets under management, etc.

The task of determining the composition of the index (i.e., hedge fundsincluded in the index), the weights assigned to each fund andperformance of the index is usually performed by a person or an entitycalled index Administrator. In determining index composition, fundweights and performance, the index Administrator typically uses a set ofpublicly disclosed principles, and/or formalized rules.

SUMMARY

This invention relates to hedge fund indexing in general and methods andsystems for constructing and maintaining investable hedge fund indicesin particular.

According to an aspect of the present invention, a method includesproviding structured products that provide a rate of return related tochanges in a value of a hedge fund index that includes of a plurality ofhedge funds. The method also includes adjusting weights of the pluralityof hedge funds in the hedge fund index according to a set of rules basedon changes in monetary exposure of the structured products associatedwith the index.

Embodiments can include one or more of the following. The monetaryexposure can be related to a cash flow into the structured productsassociated with the index and issue of new structured products. Themonetary exposure can be related to a cash flow out of the structuredproducts associated with the index and termination of the outstandingstructured products. A set of funds included in the set of investmentsassociated with the structured products can be different from theplurality of hedge funds in the hedge fund index. The weights of fundsincluded in the set of investments associated with the structuredproducts can be different from the weights these funds in the hedge fundindex. The structured products can include one or more of options,swaps, principle protected notes, puts, and forwards.

Adjusting the weights can include adjusting the weights based on anestimate of the maximum amounts that can be redeemed from the hedgefunds. Adjusting the weights can include adjusting the weights based onan estimate of the dates at which the redemptions are allowed. Adjustingthe weights can include adjusting the weights based on an estimate ofthe redemption notice periods prescribed by the hedge fund. Adjustingthe weights can include adjusting the weights based on an estimate ofthe redemption rules prescribed by the hedge fund. Adjusting the weightscan include adjusting the weights based on an estimate of the maximumamounts that can be invested in the hedge funds in the future. Adjustingthe weights can include adjusting the weights based on an estimate ofthe maximum amounts that can be invested in the hedge funds in thefuture and maximum amounts that can be invested on each particular datein the future.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to adjust weights of a plurality of hedge funds in a hedge fundindex according to a set of rules based on changes in monetary exposureof structured products associated with the index, the structuredproducts providing a rate of return related to changes in a value of thehedge fund index.

Embodiments can include one or more of the following. The monetaryexposure can be related to a cash flow into the structured productsassociated with the index and issue of new structured products. Themonetary exposure can be related to a cash flow out of the structuredproducts associated with the index and termination of the outstandingstructured products. A set of funds included in the set of investmentsassociated with the structured products may be different from theplurality of hedge funds in the hedge fund index and the weights offunds included in the set of investments associated with the structuredproducts may be different from the weights these funds in the hedge fundindex. The structured products can include one or more of options,swaps, principle protected notes, puts, and forwards.

In another aspect, the invention includes a system that includes aprocessor. The processor is configured to adjust weights of a pluralityof hedge funds in a hedge fund index according to a set of rules basedon changes in monetary exposure of structured products associated withthe index, the structured products providing a rate of return related tochanges in a value of the hedge fund index.

Embodiments can include one or more of the following. The monetaryexposure can be related to a cash flow into the structured productsassociated with the index and issue of new structured products. Themonetary exposure can be related to a cash flow out of the structuredproducts associated with the index and termination of the outstandingstructured products. A set of funds included in the set of investmentsassociated with the structured products may be different from theplurality of hedge funds in the hedge fund index and the weights offunds included in the set of investments associated with the structuredproducts may be different from the weights these funds in the hedge fundindex. The structured products can include one or more of options,swaps, principle protected notes, puts, and forwards.

According to an aspect of the present invention, a method includesproviding an index representing a plurality of hedge funds, each of theplurality of hedge funds having an associated weight. The method alsoincludes determining a capacity limit for a particular one of theplurality of hedge funds based on a maximum amount that can be investedin the hedge fund and adjusting an associated weight in the index forthe particular one of the plurality of hedge funds based on thedetermined capacity limit.

Embodiments can include one or more of the following. The maximum amountthat can be allocated to the hedge fund according the set ofpredetermined rules can be based on the maximum amount that the hedgefund is willing to accept. The maximum amount that can be allocated tothe hedge fund according the set of predetermined rules can be based onthe maximum amount that the index provider can invest in the hedge fundbased on risk management limitations of the index provider. The maximumamount that can be invested in the hedge fund according the set ofpredetermined rules can be based on the maximum amount that the indexprovider can allocate to the hedge fund based on regulatory limitations,contractual limitations or fiduciary responsibilities.

According to an aspect of the present invention, a method includesproviding an index representing a plurality of hedge funds, each of theplurality of hedge funds having an associated weight. The method alsoincludes estimating a capacity limit for a particular one of theplurality of hedge funds based on a maximum amount that can be redeemedfrom the hedge fund and adjusting the weight for a particular one of thehedge funds based on the estimate of the maximum amount that can beredeemed from the hedge fund.

Embodiments can include one or more of the following. Adjusting theassociated weight for the particular one of the plurality of hedge fundsfurther can include adjusting the weight based on an estimate of thedate at which a redemption is allowed. Adjusting the associated weightfor the particular one of the plurality of hedge funds further caninclude adjusting the weight based on an estimate of the redemptionnotice period prescribed by the hedge fund.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to provide an index representing a plurality of hedge funds,each of the plurality of hedge funds having an associated weight. Thecomputer program product is also operable to cause a machine todetermine a capacity limit for a particular one of the plurality ofhedge funds based on a maximum amount that can be invested in the hedgefund and adjust an associated weight in the index for the particular oneof the plurality of hedge funds based on the determined capacity limit.

Embodiments can include one or more of the following. The maximum amountthat can be allocated to the hedge fund according the set ofpredetermined rules can be based on the maximum amount that the hedgefund is willing to accept. The maximum amount that can be allocated tothe hedge fund according the set of predetermined rules can be based onthe maximum amount that the index provider can invest in the hedge fundbased on risk management limitations of the index provider. The maximumamount that can be invested in the hedge fund according the set ofpredetermined rules can be based on the maximum amount that the indexprovider can allocate to the hedge fund based on regulatory limitations,contractual limitations or fiduciary responsibilities.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to provide an index representing a plurality of hedge funds,each of the plurality of hedge funds having an associated weigh,estimate a capacity limit for a particular one of the plurality of hedgefunds based on a maximum amount that can be redeemed from the hedgefund, and adjust the weight for a particular one of the hedge fundsbased on the estimate of the maximum amount that can be redeemed fromthe hedge fund.

Embodiments can include one or more of the following. The instructionsto cause the machine to adjust the associated weight for the particularone of the plurality of hedge funds can includes instructions to causethe machine to adjust the weight based on an estimate of the date atwhich a redemption is allowed. The instructions to cause the machine toadjust the associated weight for the particular one of the plurality ofhedge funds can include instructions to cause the machine to adjust theweight based on an estimate of the redemption notice period prescribedby the hedge fund.

In another aspect, the invention includes a system configured to providean index representing a plurality of hedge funds, each of the pluralityof hedge funds having an associated weight, determine a capacity limitfor a particular one of the plurality of hedge funds based on a maximumamount that can be invested in the hedge fund, and adjust an associatedweight in the index for the particular one of the plurality of hedgefunds based on the determined capacity limit.

Embodiments can include one or more of the following. The maximum amountthat can be allocated to the hedge fund according the set ofpredetermined rules can be based on the maximum amount that the hedgefund is willing to accept. The maximum amount that can be allocated tothe hedge fund according the set of predetermined rules can be based onthe maximum amount that the index provider can invest in the hedge fundbased on risk management limitations of the index provider. The maximumamount that can be invested in the hedge fund according the set ofpredetermined rules can be based on the maximum amount that the indexprovider can allocate to the hedge fund based on regulatory limitations,contractual limitations or fiduciary responsibilities.

In another aspect, the invention includes a system configured to providean index representing a plurality of hedge funds, each of the pluralityof hedge funds having an associated weight, estimate a capacity limitfor a particular one of the plurality of hedge funds based on a maximumamount that can be redeemed from the hedge fund, and adjust the weightfor a particular one of the hedge funds based on the estimate of themaximum amount that can be redeemed from the hedge fund.

Embodiments can include one or more of the following. The system can befurther configured to adjust the weight based on an estimate of the dateat which a redemption is allowed. The system can be further configuredto adjust the weight based on an estimate of the redemption noticeperiod prescribed by the hedge fund.

According to an aspect of the present invention, a method includesdetermining weights of a plurality of hedge funds in a hedge fund indexaccording to a set of rules, wherein the weights differ from a set ofweights of the hedge funds in an actual investment associated with thehedge fund index.

Embodiments can include one or more of the following. The method canalso include providing a return for the hedge fund index, wherein thereturn of the index and a return of the actual investment differ. Theweight can be non-negative. Determining the weights of the plurality ofhedge funds in the hedge fund index can include adjusting the weights ofthe hedge funds according to changes in a notional amount associatedwith the hedge fund index. The changes in the notional amount can bebased on changes to a monetary exposure to products associated with thehedge fund index. The products can be structured products.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to determine weights of a plurality of hedge funds in a hedgefund index according to a set of rules, wherein the weights differ froma set of weights of the hedge funds in an actual investment associatedwith the hedge fund index.

Embodiments can include one or more of the following. The computerprogram product can further include instructions to cause the machine toprovide a return for the hedge fund index, wherein the return of theindex and a return of the actual investment differ. The weight can benon-negative. The instructions to cause the machine to determine theweights of the plurality of hedge funds in the hedge fund index furthercan include instructions to cause the machine to adjust the weights ofthe hedge funds according to changes in a notional amount associatedwith the hedge fund index. The changes in the notional amount can bebased on changes to a monetary exposure to products associated with thehedge fund index. The products can be structured products.

In another aspect, the invention includes a system configured todetermine weights of a plurality of hedge funds in a hedge fund indexaccording to a set of rules, wherein the weights differ from a set ofweights of the hedge funds in an actual investment associated with thehedge fund index.

Embodiments can include one or more of the following. The system can befurther configured to provide a return for the hedge fund index, whereinthe return of the index and a return of the actual investment differ.The weight can be non-negative. The system can be further configured toadjust the weights of the hedge funds according to changes in a notionalamount associated with the hedge fund index. The changes in the notionalamount can be based on changes to a monetary exposure to productsassociated with the hedge fund index. The products can be structuredproducts.

According to an aspect of the present invention, a method includescalculating a projected hedge fund weight for a hedge fund included in ahedge fund index, determining an estimated weight adjustment for thehedge fund, determining an adjustment factor based on an estimation oferror in the estimated weight adjustment, and determining an actualweight adjustment for the hedge fund based on the estimated weightadjustment and the adjustment factor.

Embodiments can include one or more of the following. Calculating theprojected hedge fund weight can include calculating the projected hedgefund weight based on anticipated changes to a notional amount of thehedge fund index. Calculating the projected hedge fund weight caninclude calculating the projected hedge fund weight based on outstandingweight adjustments expected to take effect in the future. The actualweight adjustment can differ from the estimated weight adjustment.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to calculate a projected hedge fund weight for a hedge fundincluded in a hedge fund index, determine an estimated weight adjustmentfor the hedge fund, determine an adjustment factor based on anestimation of error in the estimated weight adjustment, and determine anactual weight adjustment for the hedge fund based on the estimatedweight adjustment and the adjustment factor.

Embodiments can include one or more of the following. The instructionsto cause the machine to calculate the projected hedge fund weight caninclude instructions to cause the machine to calculate the projectedhedge fund weight based on anticipated changes to a notional amount ofthe hedge fund index. The instructions to cause the machine to calculatethe projected hedge fund weight can include instructions to cause themachine to calculate the projected hedge fund weight based onoutstanding weight adjustments expected to take effect in the future.The actual weight adjustment can differ from the estimated weightadjustment.

In another aspect, the invention includes a system configured tocalculate a projected hedge fund weight for a hedge fund included in ahedge fund index, determine an estimated weight adjustment for the hedgefund, determine an adjustment factor based on an estimation of error inthe estimated weight adjustment, and determine an actual weightadjustment for the hedge fund based on the estimated weight adjustmentand the adjustment factor.

Embodiments can include one or more of the following. The system can befurther configured to calculate the projected hedge fund weight based onanticipated changes to a notional amount of the hedge fund index. Thesystem can be further configured to calculate the projected hedge fundweight include instructions to cause the machine to calculate theprojected hedge fund weight based on outstanding weight adjustmentsexpected to take effect in the future. The actual weight adjustment candiffer from the estimated weight adjustment.

According to an aspect of the present invention, a method includesdetermining, based on a set of target hedge fund weights and a set ofestimated hedge fund weights, at least one of a subset of hedge funds inthe index that are over-weighted and a subset of hedge funds in theindex that are under-weighted. The method also includes adjustingweights of the index by increasing the weights of at least some of theunder-weighted hedge funds based on an increase in monetary exposure ofa set of products associated with the hedge fund index if there existsan increase in monetary exposure or decreasing the weights of at leastsome of the over-weighted hedge funds based on a decrease in monetaryexposure of the set of products associated with the hedge fund index ifthere exists an decrease in monetary exposure.

Embodiments can include one or more of the following. The over-weightedhedge funds can include hedge funds with an estimated hedge fund weightthat is greater than the target hedge fund weight. The under-weightedhedge funds can include hedge funds with an estimated hedge fund weightthat is less than the target hedge fund weight. The change in monetaryexposure can be related to a cash flow into or out of the structuredproducts associated with the index. Increasing the weights can includeincreasing the weights of a plurality of under-weighted hedge fundsbased on an amount that the fund is under-weighted. Decreasing theweights can include decreasing the weights of a plurality ofover-weighted hedge funds based on an amount that the fund isover-weighted.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to determine, based on a set of target hedge fund weights and aset of estimated hedge fund weights, at least one of subset of hedgefunds in the index that are over-weighted and a subset of hedge funds inthe index that are under-weighted. The computer program product is alsooperable to cause a machine to adjust weights of the index. Theinstructions for causing the machine to adjust the weights of the indexinclude instructions for causing the machine to increase the weights ofat least some of the under-weighted hedge funds based on an increase inmonetary exposure of a set of products associated with the hedge fundindex if there exists an increase in monetary exposure or decrease theweights of at least some of the over-weighted hedge funds based on adecrease in monetary exposure of the set of products associated with thehedge fund index if there exists an decrease in monetary exposure.

Embodiments can include one or more of the following. The over-weightedhedge funds can include hedge funds with an estimated hedge fund weightthat is greater than the target hedge fund weight. The under-weightedhedge funds can include hedge funds with an estimated hedge fund weightthat is less than the target hedge fund weight. The change in monetaryexposure can be related to a cash flow into or out of the structuredproducts associated with the index. The instructions to cause themachine to increase the weights can include the instructions to causethe machine to increase the weights of a plurality of under-weightedhedge funds based on an amount that the fund is under-weighted. Theinstructions to cause the machine to decrease the weights can includethe instructions to cause the machine to decrease the weights of aplurality of over-weighted hedge funds based on an amount that the fundis over-weighted.

In another aspect, the invention includes a system configured todetermine, based on a set of target hedge fund weights and a set ofestimated hedge fund weights, at least one of subset of hedge funds inthe index that are over-weighted and a subset of hedge funds in theindex that are under-weighted. The system is further configured toadjust weights of the index by increasing the weights of at least someof the under-weighted hedge funds based on an increase in monetaryexposure of a set of products associated with the hedge fund index ifthere exists an increase in monetary exposure or decreasing the weightsof at least some of the over-weighted hedge funds based on a decrease inmonetary exposure of the set of products associated with the hedge fundindex if there exists an decrease in monetary exposure.

Embodiments can include one or more of the following. The over-weightedhedge funds can include hedge funds with an estimated hedge fund weightthat is greater than the target hedge fund weight. The under-weightedhedge funds can include hedge funds with an estimated hedge fund weightthat is less than the target hedge fund weight. The change in monetaryexposure can be related to a cash flow into or out of the structuredproducts associated with the index. The system can be configured toincrease the weights of a plurality of under-weighted hedge funds basedon an amount that the fund is under-weighted. The system can beconfigured to decrease the weights include the instructions to cause themachine to decrease the weights of a plurality of over-weighted hedgefunds based on an amount that the fund is over-weighted.

According to an aspect of the present invention, a method includesgrouping hedge funds in a hedge fund index into a plurality of strategygroups, the strategy groups comprised of hedge funds possessing similartrading strategies and associating a target strategy weight to each ofthe strategy groups, with the target strategy weight for a particularstrategy group determined according to a percentage of existing hedgefunds that exhibit similar hedging strategies as the strategy group.

Embodiments can include one or more of the following. The percentage ofhedge funds can correspond to a moving average of the percentage ofexisting hedge funds that exhibit similar hedging strategies as thestrategy group. The method can also include determining a maximumstrategy weight for each of the strategy groups, calculating a totalstrategy weight for each of the strategy groups in the index, and if thecalculated total strategy weight for a particular strategy group in theindex exceeds the maximum strategy weight, re-adjusting the hedge fundsincluded in the index. The maximum strategy weight can be approximately120% of the target strategy weight. Providing the strategy groups andassociating the target strategy weight to each of the strategy groupscan include providing a target weight percentage for each strategygroup. The method can also include determining a target fund number foreach of the strategy groups based on the target strategy weight and thetotal number of funds included in the index. The strategy groups caninclude at least one of a convertible arbitrage strategy group, a fixedincome arbitrage strategy group, an equity market neutral strategygroup, an equity long/short strategy group, a macro strategy group, amanaged futures strategy group, a merger/special strategy group, acredit strategy group, and a multi-strategy strategy group.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to group hedge funds in a hedge fund index into a plurality ofstrategy groups, the strategy groups comprised of hedge funds possessingsimilar trading strategies and associate a target strategy weight toeach of the strategy groups, with the target strategy weight for aparticular strategy group determined according to a percentage ofexisting hedge funds that exhibit similar hedging strategies as thestrategy group.

Embodiments can include one or more of the following. Te percentage ofhedge funds can correspond to a moving average of the percentage ofexisting hedge funds that exhibit similar hedging strategies as thestrategy group. The computer program product can further includeinstructions to cause a machine to determine a maximum strategy weightfor each of the strategy groups, calculate a total strategy weight foreach of the strategy groups in the index, and if the calculated totalstrategy weight for a particular strategy group in the index exceeds themaximum strategy weight, re-adjust the hedge funds included in theindex. The instructions to cause a machine to provide the strategygroups and associate the target strategy weight to each of the strategygroups can include instructions to cause a machine to provide a targetweight percentage for each strategy group. The computer program productcan also include instructions to cause a machine to determine a targetfund number for each of the strategy groups based on the target strategyweight and the total number of funds included in the index. The strategygroups can include at least one of a convertible arbitrage strategygroup, a fixed income arbitrage strategy group, an equity market neutralstrategy group, an equity long/short strategy group, a macro strategygroup, a managed futures strategy group, a merger/special strategygroup, a credit strategy group, and a multi-strategy strategy group.

In another aspect, the invention includes a system configured to grouphedge funds in a hedge fund index into a plurality of strategy groups,the strategy groups comprised of hedge funds possessing similar tradingstrategies and associate a target strategy weight to each of thestrategy groups, with the target strategy weight for a particularstrategy group determined according to a percentage of existing hedgefunds that exhibit similar hedging strategies as the strategy group.

Embodiments can include one or more of the following. The percentage ofhedge funds can correspond to a moving average of the percentage ofexisting hedge funds that exhibit similar hedging strategies as thestrategy group. The system can be further configured to determine amaximum strategy weight for each of the strategy groups, calculate atotal strategy weight for each of the strategy groups in the index, andif the calculated total strategy weight for a particular strategy groupin the index exceeds the maximum strategy weight, re-adjust the hedgefunds included in the index. The system can be further configured toprovide a target weight percentage for each strategy group. The systemcan be further configured to determine a target fund number for each ofthe strategy groups based on the target strategy weight and the totalnumber of funds included in the index. The strategy groups can includeat least one of a convertible arbitrage strategy group, a fixed incomearbitrage strategy group, an equity market neutral strategy group, anequity long/short strategy group, a macro strategy group, a managedfutures strategy group, a merger/special strategy group, a creditstrategy group, and a multi-strategy strategy group.

According to an aspect of the present invention, a method includescalculating a projected hedge fund weight for hedge funds included inthe index, the projected hedge fund weight based on an estimate of aweight of the hedge fund over a period. The method also includesdetermining adjustments to make to one or more of the hedge fund weightsbased on hedge fund weight limits, determining adjustments to make tostrategy weights based on a strategy weight limit, and determiningnormalization adjustments to make to the index to provide a sum of theprojected weights for the funds in the index to equal a specified value.

Embodiments can include one or more of the following. The method caninclude adjusting the fund weights based on the determined adjustmentsand re-calculating a projected fund weight for the funds included in theindex based on the determined adjustments made to the fund weights,wherein determining what, if any, adjustments need to be made to thestrategy weights based on a fund weight allocation can includedetermining what, if any, adjustments need to be made to the strategyweights based on the re-calculated weights of hedge funds in the hedgefund index. Calculating the projected fund weight can includecalculating the fund weight based on an index notional amount. The indexnotional amount can indicate a total amount invested in productsassociated with the index. Calculating the projected fund weight caninclude calculating the fund weight based on outstanding adjustments.

Calculating the projected fund weight can include calculating theprojected fund weight according to${pfw}_{m,n}^{b} = {{( {{efw}_{{m - 1},n}^{b} - \varpi_{{m - 1},n}^{b}} ){\eta_{{m - 1},n}^{b}/\eta_{m,n}^{b}}} + {\sum\limits_{k = 1}^{n}{\alpha_{m,k}{\eta_{m,k}^{b}/\eta_{m,n}^{b}}}}}$where m corresponds to a target month for which the projected fundweight is being calculated, n corresponds to a current month, where n<m,k corresponds to a month in which an adjustment was determined, wherek<m, pfw_(m,n) ^(b) corresponds to a Projected Fund Weight of an IndexFund at the beginning of Target Month m as determined in current monthn, efw_(m-1,n) ^(b) corresponds to an Estimated Fund Weight of an IndexFund at the beginning of month m−1 determined during the current month nby the Index Administrator based on the latest available information, ω_(m-1,n) ^(b) corresponds to a Residual Weight of an Index Fund at thebeginning of month m−1 determined during the current month n, η_(m,n)^(b) corresponds to an Estimated Index Notional Amount at the beginningof the Target Month m determined during the current month n by the IndexAdministrator based on the latest available information, and α_(m,k)corresponds to an Adjustment determined during a month k with anEffective Date as of the beginning of Target Month m.

Determining what, if any, adjustments need to be made such that a sum ofthe projected weights for the funds in the index is equal to about 100%can include determining an aggregate reallocation weight. The aggregatereallocation weight (arw_(m)) can be determined according to${{arw}_{m} = {1 - {\sum\limits_{f = 1}^{x}{pfw}_{m}^{bf}} - {\sum\limits_{f = 1}^{x}{rw}_{m}^{f}}}},$where x corresponds to a total number of Index Funds in the Index forthe month immediately preceding Target Month m, pfw_(m) ^(bf)corresponds to a Projected Fund Weight of Index Fund f at the beginningof Target Month m, and rw_(m) ^(f) corresponds to a Residual Weight ofIndex Fund f for Target Month m.

The method can also include determining if the aggregate reallocationweight is greater than zero. The method can also include, if theaggregate reallocation weight is greater than zero, increasing weightsof some of the funds included in the index in a total amount equal tothe aggregate reallocation weight. Increasing weights of at least someof the funds in an total amount equal to the aggregate reallocationweight can include increasing fund weights to minimize a differencebetween the projected strategy weight and the target strategy weight.Increasing weights of at least some of the funds in a total amount equalto the aggregate reallocation weight can include introducing new fundsto the index. The method can also include, if the aggregate reallocationweight is less than zero, decreasing weights of some of the fundsincluded in the index in a total amount equal to the aggregatereallocation weight. Decreasing weights of at least some of the funds ina total amount equal to the aggregate reallocation weight can includedecreasing fund weights to minimize a difference between the targetstrategy weight and the projected strategy weight. Decreasing weights ofat least some of the funds in a total amount equal to the aggregatereallocation weight can include removing some funds from the index.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to calculate a projected hedge fund weight for hedge fundsincluded in the index, the projected hedge fund weight based on anestimate of a weight of the hedge fund over a period, determineadjustments to make to one or more of the hedge fund weights based onhedge fund weight limits, determine adjustments to make to strategyweights based on a strategy weight limit, and determine normalizationadjustments to make to the index to provide a sum of the projectedweights for the funds in the index to equal a specified value.

Embodiments can include one or more of the following. The computerprogram produce can include instructions to cause a machine to adjustthe fund weights based on the determined adjustments and re-calculate aprojected fund weight for the funds included in the index based on thedetermined adjustments made to the fund weights, wherein determiningwhat, if any, adjustments need to be made to the strategy weights basedon a fund weight allocation can include determining what, if any,adjustments need to be made to the strategy weights based on there-calculated weights of hedge funds in the hedge fund index. Theinstructions to cause the machine to calculate the projected fund weightcan include instructions to cause the machine to calculate the fundweight based on an index notional amount, the notional amount indicatinga total amount invested in products associated with the index. Thecomputer program produce can include instructions to cause a machine todetermine if the aggregate reallocation weight is greater than zero and,if the aggregate reallocation weight is greater than zero, increaseweights of some of the funds included in the index in a total amountequal to the aggregate reallocation weight, wherein the instructions tocause the machine to increase weights of at least some of the fundsinclude at least one of instructions to cause the machine to increasefund weights to minimize a difference between the projected strategyweight and the target strategy weight and instructions to cause themachine to introduce new funds to the index. The computer programproduce can include instructions to cause a machine to determine if theaggregate reallocation weight is less than zero and, if the aggregatereallocation weight is less than zero, decrease weights of some of thefunds included in the index in a total amount equal to the aggregatereallocation weight, wherein the instructions to cause the machine todecrease weights of at least some of the funds in an total amount equalto the aggregate reallocation weight include at least one ofinstructions to cause the machine to decrease fund weights to minimize adifference between the target strategy weight and the projected strategyweight and instructions to cause the machine to remove some funds fromthe index.

In another aspect, the invention includes a system configured tocalculate a projected hedge fund weight for hedge funds included in theindex, the projected hedge fund weight based on an estimate of a weightof the hedge fund over a period, determine adjustments to make to one ormore of the hedge fund weights based on hedge fund weight limits,determine adjustments to make to strategy weights based on a strategyweight limit, and determine normalization adjustments to make to theindex to provide a sum of the projected weights for the funds in theindex to equal a specified value.

Embodiments can include one or more of the following. The system can befurther configured to adjust the fund weights based on the determinedadjustments and re-calculate a projected fund weight for the fundsincluded in the index based on the determined adjustments made to thefund weights, wherein determining what, if any, adjustments need to bemade to the strategy weights based on a fund weight allocation caninclude determining what, if any, adjustments need to be made to thestrategy weights based on the re-calculated weights of hedge funds inthe hedge fund index. The system can be further configured to calculatethe fund weight based on an index notional amount, the notional amountindicating a total amount invested in products associated with theindex.

According to an aspect of the present invention, a method includescalculating a hedge fund weight for a hedge fund included in the index,determining if the calculated hedge fund weight exceeds a fund weightmaximum, the hedge fund weight maximum corresponding to a maximumproportion of the total index that can be allocated to a particularfund, determining if the calculated fund weight is less than a minimumhedge fund weight, the minimum fund weight corresponding to a ratio of arequired capacity or exposure to the net exposure of the index, andadjusting the percentage of the index allocated to the particular fundif the calculated fund weight exceeds the fund weight maximum or is lessthan the minimum fund weight.

Embodiments can include one or more of the following. The fund weightmaximum can be equal or less than 1% of the total index. The fund weightmaximum can be equal or less than a ratio of the capacity to an indexnotional amount, the capacity corresponding to a total amount that canbe invested in the hedge fund and the index notional amount indicatingthe total monetary amount associated with the hedge fund index.Determining the minimum fund weight can include determining the minimumfund weight based on an amount that can be redeemed from the fund duringeach particular period. Determining the minimum fund weight can includedetermining the minimum fund weight based on the notice period.Determining the minimum fund weight can include determining the minimumfund weight based on the redemption frequency and particular dates whenthe fund can be redeemed. Determining if the calculated fund weight isbelow the minimum fund weight can include determining if the calculatedfund weight is below the minimum fund weight based on the notice periodfor the fund. Determining the minimum fund weight can includedetermining the minimum fund weight based on the redemption fees chargedby the fund.

Calculating the fund weight can include calculating the fund weightaccording to ω_(m) ^(e)=ω_(m) ^(b)(1+ρ_(m))/(1+κ_(m)) where ω_(m) ^(e)corresponds to a Fund Weight at the end of a Target Month m, ω_(m) ^(b)corresponds to a Fund Weight at the beginning of the Target Month m,ρ_(m) corresponds to a the Net Return of the Index Fund for the TargetMonth m, and κ_(m) corresponds to an Index Return for the Target Monthm. The variable κ_(m) can be calculated based on the weighted averagereturn of all hedge funds in the hedge fund index index. The variableκ_(m) can be calculated according to$\kappa_{m} = {{\sum\limits_{f = 1}^{x}{\rho_{m}^{f}\omega_{m}^{bf}}} - \varphi_{m}}$where x corresponds to a number of Index Funds in the Index during theTarget Month m, ρ_(m) ^(f) corresponds to a Net Return of Index Fund fduring the Target Month m, ω_(m) ^(bf) corresponds to a Fund Weight ofIndex Fund f at the beginning of the Target Month m, φ_(m) correspondsto an Index Administration Fee for the Target Month m.

According to an aspect of the present invention, a method includesperiodically balancing an index of a plurality of hedge funds bycalculating hedge fund weights for the hedge funds included in theindex, determining if any of the calculated hedge fund weights exceed afund weight maximum corresponding to a maximum proportion of the totalindex that can be allocated the hedge fund, determining if any of thecalculated fund weights are less than a minimum proportion of the totalindex that can be allocated to the hedge fund, and adjusting thepercentage of the index allocated to particular ones of the hedge funds,for those hedge funds having a calculated fund weight that exceeds thefund weight maximum or is less than the minimum fund weight.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to calculate a hedge fund weight for a hedge fund included inthe index, determine if the calculated hedge fund weight exceeds a fundweight maximum, the hedge fund weight maximum corresponding to a maximumproportion of the total index that can be allocated to a particularfund, determine if the calculated fund weight is less than a minimumhedge fund weight, the minimum fund weight corresponding to a ratio of arequired capacity or exposure to the net exposure of the index, andadjust the percentage of the index allocated to the particular fund ifthe calculated fund weight exceeds the fund weight maximum or is lessthan the minimum fund weight.

Embodiments can include one or more of the following. The fund weightmaximum can be equal or less than a ratio of the capacity to an indexnotional amount, the capacity corresponding to a total amount that canbe invested in the hedge fund and the index notional amount indicatingthe total monetary amount associated with the hedge fund index. Theinstructions to cause the machine to determine the minimum fund weightcan include one or more of instructions to cause the machine todetermine the minimum fund weight based on an amount that can beredeemed from the fund during each particular period, instructions tocause the machine to determine the minimum fund weight based on thenotice period, instructions to cause the machine to determine theminimum fund weight based on the redemption frequency and particulardates when the fund can be redeemed. The instructions to cause themachine to determine if the calculated fund weight is below the minimumfund weight can include the instructions to cause the machine todetermine if the calculated fund weight is below the minimum fund weightbased on the notice period for the fund based on the redemption feescharged by the fund.

In another aspect, the invention includes a computer program product forbalancing an index of a plurality of hedge funds. The computer programproduct tangibly embodied in an information carrier, for executinginstructions on a processor. The computer program product is operable tocause a machine to calculate hedge fund weights for the hedge fundsincluded in the index, determine if any of the calculated hedge fundweights exceed a fund weight maximum corresponding to a maximumproportion of the total index that can be allocated the hedge fund,determine if any of the calculated fund weights are less than a minimumproportion of the total index that can be allocated to the hedge fund,and adjust the percentage of the index allocated to particular ones ofthe hedge funds, for those hedge funds having a calculated fund weightthat exceeds the fund weight maximum or is less than the minimum fundweight.

In another aspect, the invention includes a system configured tocalculate a hedge fund weight for a hedge fund included in the index,determine if the calculated hedge fund weight exceeds a fund weightmaximum, the hedge fund weight maximum corresponding to a maximumproportion of the total index that can be allocated to a particularfund, determine if the calculated fund weight is less than a minimumhedge fund weight, the minimum fund weight corresponding to a ratio of arequired capacity or exposure to the net exposure of the index, andadjust the percentage of the index allocated to the particular fund ifthe calculated fund weight exceeds the fund weight maximum or is lessthan the minimum fund weight.

Embodiments can include one or more of the following. The fund weightmaximum can be equal or less than a ratio of the capacity to an indexnotional amount, the capacity corresponding to a total amount that canbe invested in the hedge fund and the index notional amount indicatingthe total monetary amount associated with the hedge fund index. Thesystem can be configured to determine the minimum fund weight based onat least one of an amount that can be redeemed from the fund during eachparticular period, a notice period, a redemption frequency andparticular dates when the fund can be redeemed. The system can befurther configured to determine if the calculated fund weight is belowthe minimum fund weight based on the notice period for the fund based onthe redemption fees charged by the fund

In another aspect, the invention includes a system for periodicallybalancing an index of a plurality of hedge funds. The system beingconfigured to calculate hedge fund weights for the hedge funds includedin the index, determine if any of the calculated hedge fund weightsexceed a fund weight maximum corresponding to a maximum proportion ofthe total index that can be allocated the hedge fund, determine if anyof the calculated fund weights are less than a minimum proportion of thetotal index that can be allocated to the hedge fund, and adjust thepercentage of the index allocated to particular ones of the hedge funds,for those hedge funds having a calculated fund weight that exceeds thefund weight maximum or is less than the minimum fund weight.

According to an aspect of the present invention, a method includesapplying a first subset of eligibility rules to a plurality of hedgefunds to generate a first subset of the plurality of hedge funds thatsatisfy the first subset of eligibility rules and subsequent to applyingthe first subset of eligibility rules, sequentially applying remainingsubsets of eligibility rules to the plurality of hedge funds to providea set of eligible hedge funds that satisfy the applied subsets ofeligibility rules to include in the hedge fund index.

Embodiments can include one or more of the following. The method caninclude providing a set of eligibility rules and grouping the set ofeligibility rules into the multiple subsets of eligibility rules. Themethod can include providing a set of data elements and grouping the setof data elements into the multiple subsets of data elements, eachcorresponding to a specific subset of eligibility rules. The method caninclude collecting a first subset of data elements corresponding to thefirst subset of eligibility rules for the plurality of hedge funds priorto applying the first subset of eligibility rules and sequentiallycollecting the next subset of data elements for the fund that satisfyall already applied subsets of eligibility rules prior to applying thenext subset of eligibility rules. The method can include grouping theeligibility rules in the multiple subsets of eligibility rules based onthe availability of the data elements and the cost of collecting missingdata elements in each subset of data elements corresponding to eachsubset of eligibility rules. The method can include removing duplicatehedge fund entities from the plurality of hedge funds prior to applyingthe first subset of eligibility rules. Removing duplicate entities caninclude removing duplicate entities based on one or more criteriaselected from the group consisting of similar entity names for the hedgefund entities, similar addresses for the hedge fund entities, similarassets under management for the hedge fund entities, and historicalreturns for the hedge fund entities.

In another aspect, the invention includes a computer program producttangibly embodied in an information carrier, for executing instructionson a processor. The computer program product is operable to cause amachine to apply a first subset of eligibility rules to a plurality ofhedge funds to generate a first subset of the plurality of hedge fundsthat satisfy the first subset of eligibility rules and subsequent toapplying the first subset of eligibility rules, sequentially applyremaining subsets of eligibility rules to the plurality of hedge fundsto provide a set of eligible hedge funds that satisfy the appliedsubsets of eligibility rules to include in the hedge fund index.

Embodiments can include one or more of the following. The computerprogram product can include instructions to cause the machine to providea set of eligibility rules and grouping the set of eligibility rulesinto the multiple subsets of eligibility rules. The computer programproduct can include instructions to cause the machine to provide a setof data elements and grouping the set of data elements into the multiplesubsets of data elements, each corresponding to a specific subset ofeligibility rules. The computer program product can include instructionsto cause the machine to collect a first subset of data elementscorresponding to the first subset of eligibility rules for the pluralityof hedge funds prior to applying the first subset of eligibility rulesand sequentially collect the next subset of data elements for the fundthat satisfy all already applied subsets of eligibility rules prior toapplying the next subset of eligibility rules. The computer programproduct can include instructions to cause the machine to group theeligibility rules in the multiple subsets of eligibility rules based onthe availability of the data elements and the cost of collecting missingdata elements in each subset of data elements corresponding to eachsubset of eligibility rules. The computer program product can includeinstructions to cause the machine to remove duplicate hedge fundentities from the plurality of hedge funds prior to applying the firstsubset of eligibility rules. The computer program product can includeinstructions to cause the machine to remove duplicate entities based onone or more criteria selected from the group consisting of similarentity names for the hedge fund entities, similar addresses for thehedge fund entities, similar assets under management for the hedge fundentities, and historical returns for the hedge fund entities.

In another aspect, the invention includes a system configured to apply afirst subset of eligibility rules to a plurality of hedge funds togenerate a first subset of the plurality of hedge funds that satisfy thefirst subset of eligibility rules and subsequent to applying the firstsubset of eligibility rules, sequentially apply remaining subsets ofeligibility rules to the plurality of hedge funds to provide a set ofeligible hedge funds that satisfy the applied subsets of eligibilityrules to include in the hedge fund index.

Embodiments can include one or more of the following. The system can befurther configured to provide a set of eligibility rules and groupingthe set of eligibility rules into the multiple subsets of eligibilityrules. The system can be further configured to provide a set of dataelements and grouping the set of data elements into the multiple subsetsof data elements, each corresponding to a specific subset of eligibilityrules. The system can be further configured to collect a first subset ofdata elements corresponding to the first subset of eligibility rules forthe plurality of hedge funds prior to applying the first subset ofeligibility rules and sequentially collect the next subset of dataelements for the fund that satisfy all already applied subsets ofeligibility rules prior to applying the next subset of eligibilityrules. The system can be further configured to group the eligibilityrules in the multiple subsets of eligibility rules based on theavailability of the data elements and the cost of collecting missingdata elements in each subset of data elements corresponding to eachsubset of eligibility rules. The system can be further configured toremove duplicate hedge fund entities from the plurality of hedge fundsprior to applying the first subset of eligibility rules. The system canbe further configured to remove duplicate entities based on one or morecriteria selected from the group consisting of similar entity names forthe hedge fund entities, similar addresses for the hedge fund entities,similar assets under management for the hedge fund entities, andhistorical returns for the hedge fund entities.

Features and advantages of the invention are in the description,drawings and claims.

DESCRIPTION OF DRAWINGS

FIG. 1 is a block diagram of a computer system.

FIG. 2 is a block diagram that diagrammatically depicts a hedge fundindex.

FIG. 3 depicts an initial index forming process.

FIG. 4 is a block diagram that depicts a relationship between sectorsand strategies.

FIG. 5 is a flow chart for determining target strategy weights.

FIG. 6 is a chart of exemplary target strategy weight limits for each ofthe strategies of FIG. 4.

FIG. 7 is a chart of exemplary weights of the strategies of FIG. 4.

FIG. 8 is a chart of an exemplary number of funds to be included in thehedge fund index for each of the strategies of FIG. 4.

FIG. 9 is a flow chart of a hedge fund selection process.

FIG. 10 is a flow chart depicting another aspect of the hedge fundselection process.

FIG. 11 is a flow chart of adjustment processes.

FIG. 12 is a flow chart of an adjustment process.

FIGS. 13A and 13B are a flow chart of a fund weight adjustment process.

FIG. 14 is a flow chart of a strategy weight adjustment process.

FIG. 15 is a flow chart of a reallocation adjustment process.

FIG. 16 is a flow chart of a reallocation adjustment process.

DETAILED DESCRIPTION

Referring to FIG. 1, a computer system 10 includes a processor 12including a central processor unit 13 and a main memory 14interconnected by a computer system bus 15. In addition, the computersystem 10 has a network interface 20 coupled via a network 19 to anothercomputer system 18. The computer system 10 further includes a storageadapter 26 coupled to the computer system bus 15 and coupled to a diskdrive 28 via a storage bus 27. Computer system 18 illustrativelyprovides computer system 10 with current information regarding hedgefunds. This information can be communicated over the network 19 to theinterface 20. The information can be stored as a file or data structure30 on the mass storage device 28.

The mass storage device 28 also includes index rebalancing software 40.Index rebalancing software uses the information in file 30 to producerebalancing index weights for each hedge fund in a hedge fund index.

The above-described architecture is that of a general purpose, networkedcomputer system. It should be understood that any type of computersystem such as a server or non-network personal computer system providedwith the information regarding current characteristics of a large groupof hedge funds (sometimes referred to as a hedge fund Universe) could beused to operate the index management software 40, e.g., perform all orpart of the functions of an index administrator.

The process of index construction and maintenance can be viewed as aprocess resulting in assigning non-negative weights to each fund in thehedge fund Universe for each calculation period. The funds that areassigned positive weight are said to be “included in the index”. Thefunds that are assigned zero weight are said to be “excluded” from theindex. This assignment of weights is performed at the start of eachcalculation period.

In general, the hedge fund index is governed by an index administratorthat is responsible for the construction, valuation, and maintenance ofthe hedge fund index through application of the rules. Thus, the hedgefund index is governed by a set of rules included in the indexrebalancing software 40 that outline a process to weight funds accordingto multiple strategy groupings. According to one embodiment, the hedgefund index is a notional hedge fund index, as detailed below. Ingeneral, a notional index takes into account an actual, real-world cashflow when determining the funds and weights of the funds in the hedgefund index. The cash flows are represented as a notional amount thatspecifies a total amount currently represented by the funds in the hedgefund index. The index rebalancing software 40 includes rules thatprovide guidelines for the index rebalancing software 40 to determinewhat funds to include in the hedge fund index and to determine arelative weight for the funds included in the hedge fund index (asdescribed below).

Index Valuation

The index funds constitute a subset of the funds available on the market(e.g., the Universe of hedge funds). The process of index valuation canbe viewed as a process of determining returns to each hedge fund in theUniverse for the calculation period and using these returns and assignedweights to determine returns and values of the index.

Once the weights at the start of the period and returns for the periodare determined, the return of the index for the period may be determinedas the weighted average return across all funds in the universe inaccordance with the following formula:$\kappa_{m} = {\sum\limits_{m = 1}^{x}{\rho_{m}\omega_{m}^{b}}}$where:

-   -   κ_(m) represents the return of the index for the period,    -   x represents the number of funds in the Universe,    -   ω_(m) ^(b) represents the weight of the fund m at the beginning        of the period, and    -   ρ_(m) represents the return of the fund m during the period.        The weights of the funds at the end of the period are determined        according to the following formula:        ω_(m) ^(e)=ω_(m) ^(b)(1+ρ_(m))/(1+κ_(m))        Where:

ω_(m) ^(e) represents the weight of fund m at the end of a period.

After that this iterative process can be repeated for the nextcalculation period.

Hedging Index Exposure

The index provider gives investors an ability to obtain economicexposure to the index by issuing structured products linked to theindex. In a simplified example of such a product, consider a swap withnotional amount (e.g., a notional amount is the total exposure of theindex provider to index linked structured products) of $100M, where theindex provider pays the investor the monthly return on the indexmultiplied by $100M, while investor pays the index provider 500,000. Ifthe index return for this month is 1%, the cash flow of the indexprovider is −$500,000.

To avoid potential losses, the index provider will typically try tocreate a hedge. For example, the index provider will borrow $100M andinvest the $100M into index funds in proportion matching the weights ofthese funds in the index. Assuming that the index provider has to pay$300,000 interest on the borrowed 100M, the cash flow of the indexprovider will be:

$0.5M swap payments from investor

$1M return on the hedge

($0.3M) interest on borrowed $100M

($1M) swap payment to the investor

so that the index provider earns 0.2M dollars, and, given that indexprovider created a perfect hedge, these earnings do not depend on theindex return.

The index provider may either not be able to invest all $100M in indexfunds or may not be able to match the weights of the funds in the indexexactly. For example, if some of the index funds do not acceptinvestments during this particular period the index provider will not beavle to match the weights of those funds in the index. As the result ofsuch liquidity limitations the hedge is not perfect and there can be adifference between the index return and the hedge return. Thisdifference is often referred to as a tracking error. Thus, the $0.2Mprofit is not guaranteed and the index provider bears the riskassociated with the mishedge.

At the expiration of the swap the index provider needs to liquidate thehedge. This may prove difficult or impossible to do if, for example,some of the funds in the index have lock-ups, allow redemptions onlyquarterly, or require a long notice period. These liquidity limitationswhich are common for hedge funds create another source of risk for theindex provider, namely residual exposure.

One way for an index administrator to avoid tracking error and theassociated risk is to limit the choice of funds for the index to onlythose funds that provide a reasonable guarantee that either there willbe no tracking error or at least that the tracking error will be verysmall. This approach, however, can lead to the index being notrepresentative of the hedge funds in the market. Another approach is tocreate an index that explicitly takes into account capacity andliquidity limits associated with investing in hedge funds.

Index Rebalancing

The weights of the hedge funds included in the index change with timedue to differences in performance of individual hedge funds. This maylead to the index being out of balance in terms of the weights ofindividual hedge funds, as well as in terms of the strategy weights (asdescribed below). The process by which the index administrator bringsthe weights of individual funds and strategies back to the target rangesis called index rebalancing.

In different embodiments, the rules may require rebalancing everycalculation period, e.g., daily or monthly rebalancing, or requirerebalancing less frequently, e.g., quarterly or annually. In some cases,the rules may specify that the types of rebalancing transactionsdepended on the period. For example, during monthly rebalancing fundscan be only removed from the index (e.g., the fund weight set to 0),while other changes to the fund weights may be allowed quarterly orannually.

Thus, the hedge fund index is governed by a set of rules programmed inthe index management software 40 that outline a process to weight fundsand valuation of the index.

According some embodiments, the hedge fund index is a exposure-drivenhedge fund index, as detailed below. In general, an exposure-drivenindex takes into account the total exposure of the index provider to theindex-linked structured products and actual, real-world capacity andliquidity limits when determining the weights of the funds in the hedgefund index. These limits may be expressed in dollars or as proportionsof the total index provider's exposure to the index.

The index rebalancing software 40 includes rules that provide guidelinesfor the index rebalancing software 40 to determine what funds to includein the hedge fund index and to determine relative weights for the fundsincluded in the hedge fund index by taking into account capacity andliquidity limits as described below.

Referring to FIG. 2, a representation of an exposure-driven hedge fundindex is shown. The exposure-driven hedge fund index includes multiplehedge funds (e.g., hedge funds 64, 66, 68, 70, and 72). Each of thehedge funds has an associated weighs (e.g., weights 74, 76, 78, 80, and82) that represents the proportion (e.g., a percentage) of the indexallocated to the fund.

Both the hedge funds included in the hedge fund index and the weights ofthe funds can vary over time based on performance of a particular hedgefund and the operation and implementation of a set of rules that governthe hedge fund index (e.g., as indicated by revised weights 84, 86, 88,90, and 92).

In general, the composition of the hedge fund index is determined basedon a set of rules as opposed to being subjectively selected by anindividual through an investment entity. Therefore, the hedge fund indexand the resulting performance can be based on a mathematical model(specified by the rules) rather than the result of an actual investment.

In order to determine the funds 52 to include in the hedge fund indexand the weights 54 of those funds, the hedge fund index combinesabstract rules taking into account changes in exposure of the indexprovider to the index and capacity and liquidity limits. The rules allowa computer to make choices similar to the choices made for an actualfund of investments by stipulating if a fund is included in the hedgefund index (or removed from the index) and by specifying how the fundshould be weighted relative to other funds and how the weights should bechanged as the result of rebalancing.

The total exposure of the index provider to index linked structuredproducts (expressed in an appropriate currency) is often called indexnotional amount. At any given moment index notional amount can be viewedas the total amount that needs to be invested in the hedge fundscomprising the hedge fund index on pro-rata basis in order to give theindex provider a perfect protection against any changes in the value ofthe index-linked structured products caused by changes in the indexlevel. The portfolio of these investments is called the hedge.

For example, let's assume that the notional amount 62 increases by$100M. In the absence of liquidity limits the index provider can invest$100M in the funds 52 on pro-rata basis, thereby maintaining protectionagainst any future changes in the index level, i.e., maintaining aperfect hedge. So, there is no need to change the weights 54 of thefunds 52 in the index.

In reality one or more funds 52 may not accept additional investmentsduring this particular period or may be even completely closed to newinvestments, making pro-rata distribution impossible and creatingdifferences in the weights of the funds in the index and in the hedge.Consequently, if the index weights 54 do not change, the index providerbecomes exposed to a risk associated with the difference in performanceof the hedge fund index and the performance of the hedge, called amishedge risk.

This event is modeled by assigning each of these funds a correspondingcapacity limit. The computer program 40 generates revised weights 56 forthe funds 52 included in the hedge fund index 50 by modeling allocationof the additional money across the hedge funds by taking into accountthe total amount to be allocated as well as capacity limits applicablefor each fund. This process leads to determination of revised weightsfor the funds in the hedge fund index, including possibly adding newfunds to the index.

In another example, let's assume that the notional amount is decreasedby $100M and pro-rata redemptions from the hedge are impossible due tothe fact that some of the funds do not allow redemptions during thisparticular period. This event is modeled by assigning each of thesefunds a corresponding liquidity limit. The computer program generatesnew weights and/or removes funds from the hedge fund index to accountfor the reduction in the index notional amount 62 while taking intoaccount the liquidity limits.

For example, if hedge fund 70 had a current weight 80 of 1% and thenotional amount was doubled; the doubling of the notional amount wouldcause the weight of fund 70 to decrease to 0.5%. If hedge fund 70 wouldaccept new investments, then the weight of hedge fund 70 would increaseback to 1%. However, if the hedge fund 70 was closed to new investmentat the time the notional amount was doubled, then the weight 90 of hedgefund 70 would remain at 0.5%. This provides the advantage of allowingthe index to be tied to a real limitations (i.e., the liquidity andcapacity) but at the same time keep hedge funds that have limitedcapacity or closed to new investment in the index.

The remaining 0.5% of the total notional amount may be distributed insome manner among the funds in the index that do have additionalcapacity or may be allocated to a new fund 60 such that the initialweight of fund 60 would be 0.5%. New fund 60 would then be added to thelist of hedge funds 52 and would subsequently be adjusted in weight in amanner similar to the funds initially included in the index.

Usage of Exposure-Driven Index

The exposure-driven hedge fund index 50 generates a representativebenchmark of the performance of the hedge fund asset class because itsimulates the real-life behavior of a hedge fund investor thatencounters Capacity and Liquidity limits. The exposure-driven hedge fundindex 50 also allows to keep in the index hedge fund with very stringentcapacity and liquidity limits (such as closed funds) and allows toincrease the number of funds in the index. The number of funds in theindex is limited only by the operational infrastructure of the indexprovider, rather than by the availability of funds with high Capacityand low Liquidity limits. The exposure-driven hedge fund index 50 alsoreferences the returns of actual hedge funds, as opposed to returns ofmanaged accounts that are trying to replicate the returns of a hedgefund.

At the same time Exposure-driven index provides the index provider withan opportunity to maintain a manageable tracking error as describedbelow, thereby enabling the index provider to produce and offer “indexlinked structured products.”

For example, such product may be an option that provides a buyer areturn based on the performance of the index. Such an option wouldguarantee the buyer a return corresponding to changes in the value ofthe hedge fund index.

While the buyer's profit or loss is tied to the index, the indexprovider is not required to invest the money into the funds representedin the hedge fund index. For example, the index provider may choose toallocate the option sale proceeds in the index funds in accordance withthe weight of each fund in the index, thereby minimizing its trackingerror end risk. Alternatively, the index provider may choose not toallocate the received money according to the funds weights in the hedgefund index, but to invest all or part of the money received from thesale of the option in non-index funds or other types of investmentvehicles, thereby assuming the tracking risk but, presumably, expectingexcess returns from such allocation. In any case, the investment of theproceeds of option sale and the choice of the level of risk is made bythe index provider according to his risk appetite/aversion. Thus, therisk associated with the sale of index linked structured products ismanageable.

Although the index administrator does not necessarily invest the moneyinto the funds represented by the index, the hedge fund index isadjusted (according to the rules) to reflect the additional investmentthrough the increase in the notional amount.

Index Formation Process

Referring to FIG. 3, an index formation process 107 is shown. Indexformation process 107 includes filtering data about hedge funds from alarge set of hedge funds 109 to select a group of eligible hedge fundsaccording to rules 111. The filtering can be a multi-step process.

In an example of a two-step filtering process, at the first step asubset of eligibility criteria 93 is applied to the large set of hedgefunds 109. This filtering eliminates funds that are no longer inoperation and funds that can not be classified in one of the indexstrategies. The first step results in a subset of hedge funds calledindex Universe 97. The index Universe 97 provides the broadestrepresentation of the hedge fund industry and, in addition to being asource of the hedge funds for the index can be used to estimate theproportion of total assets under management (AUM) invested in each ofthe strategies. These proportions are called target strategy weights foreach strategy. At the second step a subset of the Universe, referred toas a set of eligible funds 99, is generated by applying a set ofeligibility criteria 95. Based on the set of eligible funds, process 107selects a subset of hedge funds 115 from the eligible hedge funds. Thehedge funds are selected to represent various investment strategies andtarget strategy weights (as described below). Process 107 also includesdetermining 117 an initial weight of each of the hedge funds in thehedge fund index. The initial weights assigned to each of the hedgefunds can vary over time based on various factors such as theperformance of the hedge fund and changes due to rebalancing 119 theindex, as discussed below.

As described above, the hedge funds included in the hedge fund index canbe selected to represent a cross-section of various domiciles,currencies, classes, and/or strategies. In general, hedge funds that aremanaged in a similar manner or have other unifying characteristics aregrouped into a particular sector and particular strategy. Hedge funds ina particular strategy use similar investment strategies and, therefore,exhibit similar potential risks and potential rewards (e.g., similarlosses and gains).

Referring to FIG. 4, the hedge fund index is comprised of multiplesectors (e.g., relative value sector 100, tactical sector 102, eventdriven sector 104, and multi-strategy sector 106). Each sector comprisesmultiple strategies. For example, the relative value sector 100,comprises a convertible arbitrage strategy 108, a fixed income strategy110, an equity market neutral strategy 112. The tactical sector 102comprises an equity long/short strategy 114, a macro strategy 116, and amanaged futures strategy 118. The event driven sector 104 comprises amerger and special situations strategy 120 and a credit strategy 122.The multi-strategy sector 106 includes a single multi-strategy strategy124.

The actual hedge funds 52 selected to represent the hedge fund index areselected from the multiple strategies, 108, 110, 112, 114, 116, 118,120, 122 and 124.

Each strategy is allocated a percentage of the total index. Thepercentage allocation can vary among the strategies. For example, hedgefunds from one strategy may make up a larger percentage of the hedgefund index than hedge funds of another strategy.

The weights for the hedge funds in the hedge fund index are based ontarget percentages for each of the strategies 108, 110, 112, 114, 116,118, 120, 122, and 124. These target percentages can vary between thevarious strategies.

The number of funds in each strategy is determined according to therules. In general, selecting the funds included in the hedge fund indexfrom the multiple sectors and strategies generates a diversified hedgefund index.

Depending on the particular implementation, number of funds in eachstrategy can be equal, proportional to the target strategy weights, ordetermined based on other rules, including rules designed to maximizethe benefits of diversification while using a minimal number of funds.

In a particular embodiment, the relative value sector 100 includes theconvertible arbitrage strategy 108, the fixed income strategy 110, andthe equity market neutral strategy 112. In general, the relative valuesector focuses on the exploitation of price inefficiencies in a varietyof markets and typically includes taking a combination of long and shortposition in various financial instruments in a way that the netportfolio exposure is minimized.

The convertible arbitrage strategy 108 is identified by investment inthe convertible securities of a company. The convertible arbitragestrategy investments often involve the simultaneous purchase of aportfolio of convertible bonds and sale of short the correspondingequity shares. Managers may hedge or trade a portion of the interestrate and credit risk through instruments such as interest rate swaps,treasuries, credit default swaps and asset swaps. The convertiblearbitrage strategy 108 also includes relative value options trading.

The fixed income arbitrage strategy 110 involves the exploitation ofprice inefficiencies in a variety of fixed income securities. The fixedincome arbitrage strategy 110 focuses on profits from price anomaliesbetween the interest rates of related securities. Trading strategies mayinclude, but are not limited to, yield curve arbitrage, government bondarbitrage, and directional trades, sovereign and corporate credittrading, mortgage arbitrage and cash versus futures.

The equity market neutral strategy 112 involves taking long and shortpositions in various equities in an attempt to benefit from relativeprice inefficiencies. In general, the market neutral strategy 112 fundsare selected to be either beta neutral, currency neutral, or both. Theinvestment approach may be either discretionary or systematic, and theportfolio will generally have a low net dollar and/or beta exposure.

The tactical sector 102 includes the equity long/short strategy 114, themacro strategy 116, and the managed futures strategy 118. In general,the tactical sector 102 focuses on capitalizing on short, intermediate,and long term market trends, as well as exploiting inefficiencies inpricing of individual securities. At any given time the portfoliotypically contains both long and short position, but the net exposuremay nevertheless be substantial.

The Equity Long/Short strategy 114 involves the purchase of equitiesthat are viewed as under-valued and the short sale of equities that areviewed as over-valued. Thus, the equity long/short strategy 114 is notmarket neutral, but instead focuses on investing on both the long andshort sides of the market. The investment approach is generallydiscretionary and the portfolio may be net long or net short.

The Macro strategy 116 involves discretionary trading in the globalcurrency, interest rate, equity, and commodity markets to take advantageof directional movements using primarily a fundamental approach. Macrostrategy 116 positions are often influenced by major economic trendsand/or events. Managers may utilize a wide variety of instruments inorder to effect their positions.

The Managed Futures strategy 118 involves systematic trading in theglobal currency, interest rate, equity and commodity markets to takeadvantage of directional movements using primarily a technical approachbased on price and market specific information. System inputs aretechnical and/or fundamental and trends are generally identified using avariety of forecasting models. Trades are most often executed in thefutures markets.

The event driven sector 104 includes the merger and special situationsstrategy 120 and the credit strategy 122. In general, the event drivensector 104 focuses on investing based on special situations that cause aprice movement.

The Merger/Special Situations strategy 120 involves investing inopportunities created by major corporate events such as, for example,acquisitions, spin-offs, bankruptcies, reorganizations,recapitalizations, and/or share buy-backs. Managers invest through avariety of securities including common equity, preferred equity,investment grade debt, distressed debt, convertible bonds and options.Trades may be both relative value and directional.

The credit strategy 122 involves buying and selling short various creditqualities of corporate debt, including distressed, high yield andinvestment grade. The credit strategy 122 can also involve buying andselling credit related products such as credit default swaps, assetswaps, and credit indices. Trades may be both relative value and/ordirectional.

The Multi-Strategy sector 106 includes a multi-strategy strategy 124.The multi-strategy strategy 124 contains funds that allocate a part oftheir assets to several strategies. In some embodiments, themulti-strategy strategy 124 focuses on combining exposure to the mostcommon hedge fund strategies such as fixed income arbitrage,merger/special situations, credit, macro, managed futures and equitylong/short.

Target Strategy Weight

Referring to FIG. 5, an exemplary process 130 for determining targetstrategy weights (e.g., the preferred or desired percentage of the hedgefund index represented by a particular strategy in the index) for thestrategies 108, 110, 112, 114, 116, 118, 120, 122, and 124 is shown. Theweights are determined based on the estimated total monetary amountinvested in hedge funds classified under the particular strategy, calledasset under management or AUM.

The “target strategy weight” for a particular strategy is about equal tothe ratio AUM for a particular strategy to the total assets undermanagement of all hedge funds that belong to one of the strategiesrepresented in the index.

In order to avoid short term changes to the target strategy weightadditional measures can be taken. For example, a more or lesssophisticated method of smoothing of short term fluctuation can be used.In the simples case—smoothing with a moving average, the ratio AUM for aparticular strategy to the total assets under management of all otherfunds that belong to one of the strategies represented in the index canbe averaged across certain period.

In order to calculate the target strategy weight, the process 130calculates 132 a sum of the assets under management for the eligiblefunds in a particular strategy and calculates 134 a sum of the totalassets under management for the funds for all of the other strategiesincluded in the index. The target strategy weight for a particularstrategy is equal to the sum of the assets under management for thestrategy divided 136 by the total assets under management. The targetstrategy weights can be re-determined on a regular basis, e.g., weekly,monthly, quarterly, or yearly.

In some embodiments, a maximum weight, also referred to as a targetstrategy weight limit, can be assigned to each strategy. Setting atarget strategy weight limit ensures that a particular strategy does notdisproportionately influence the performance of the hedge fund index. Ifa target strategy weight is set for a particular strategy, aftercalculating 136 the ratio of the sum of the assets under management forthe strategy to the total assets under management, the process 130compares 140 the calculated value to the target strategy limit for thestrategy. If the calculated value is greater than the target strategylimit, the process 130 sets 142 the target weight for the strategy equalto the target strategy limit. If the calculated value is less than orequal to the target strategy limit, the process 130 sets 138 thecalculated value as the target weight for the strategy.

Referring to FIG. 6, exemplary target strategy weight limits 150 foreach of the strategies 108, 110, 112, 114, 116, 118, 120, 122, and 124are shown. The convertible arbitrage target strategy weight limit 152for the convertible arbitrage strategy 108 is between about 10% and 20%(e.g., about 15%). The fixed income arbitrage target strategy weightlimit 154 for the fixed income arbitrage strategy 110 is between about5% and 15% (e.g., about 10%). The equity market neutral target strategyweight limit 156 for the equity market neutral strategy 112 is betweenabout 15% and 25% (e.g., about 20%). The equity long/short targetstrategy weight limit 158 for the equity long/short strategy 114 isbetween about 35% and 45% (e.g., about 40%). The macro target strategyweight limit 160 for the macro strategy 116 is between about 5% and 15%(e.g., about 10%). The managed futures target strategy weight limit 162for the managed futures strategy 118 is about 10%. The credit targetstrategy weight limit 164 for the credit strategy 120 is between about10% and 20% (e.g., about 15%). The merger/special situations targetstrategy weight limit 166 for the merger/special situations strategy 122is between about 15% and 25% (e.g., about 20%). The multi-strategytarget strategy weight limit 168 for the multi-strategy strategy 124 isbetween about 15% and 25% (e.g., about 20%).

The assignment of target strategy weight limits typically determinedbased on risk management considerations and reflect the understanding ofthe relative risks of investing in a particular strategy, as well asdiversification benefits of investing in combination of particularstrategies.

Referring to FIG. 7, an exemplary weights of the strategies 108, 110,112, 114, 116, 118, 120, 122, and 124 is shown. In this example, 34% ofthe hedge fund index is composed of funds in the equity long/shortstrategy 114, 11% of the hedge fund index is composed of funds in thecredit strategy 120, 10% of the hedge fund index is composed of funds inthe merger/special situations strategy 122, 9% of the hedge fund indexis composed of funds in the macro strategy 116, 8% of the hedge fundindex is composed of funds in the managed futures strategy 118, 8% ofthe hedge fund index is composed of funds in the fixed income arbitragestrategy 110, 8% of the hedge fund index is composed of funds in theequity market neutral strategy 112, 8% of the hedge fund index iscomposed of funds in the convertible arbitrage strategy 108, and 4% ofthe hedge fund index is composed of funds in the multi-strategy strategy124.

Number of Funds

The weight of each strategy in the index can be achieved by including acertain number of funds belonging to this strategy in the index. In theparticular implementation, in order to determine the actual number offunds to include in the hedge fund index for each of the strategies 108,110, 112, 114, 116, 118, 120, 122, and 124, the overall target fundnumber (e.g., the total number of hedge funds to be included in theindex) is multiplied by the target strategy weight and rounded to thenearest integer, yielding the target fund number for each strategy. Thisapproach provides a consistent way of increasing capacity of the indexby simply increasing the overall target number.

However, as described below as a result of the application of the rules,the actual number of index funds representing a particular strategy maybe greater than or less than the target number, and, consequently, theactual number of funds in the hedge fund index may be greater than orless than the overall target fund number.

In other implementations the target fund number for each strategy can bedetermined differently, for example, the target fund number can beexplicitly specified by the rules based on the results of a Monte Carlosimulation.

Selection of Eligible Funds

Referring to FIG. 8, an exemplary number of funds to be included in thehedge fund index for each of the strategies 108, 110, 112, 114, 116,118, 120, 122, and 124 is shown. The allocation shown in FIG. 8 is basedon an overall target fund number of 250 and the weights shown in FIG. 7.

Referring to FIG. 9, a hedge fund selection process 200 for selectingthe hedge funds to include in the hedge fund index for each of thestrategies 108, 110, 112, 114, 116, 118, 120, 122 and 124 is shown. Theselection process 200 begins with a listing of hedge funds 202 for whichinformation about the fund is available. The information about the fundscan be stored in a proprietary database or can be provided by thirdparty data providers. In some examples, the database can include a largenumber of funds, e.g., 10,000 to 15,000 hedge funds. The large number ofhedge funds 202 is filtered 204 to generate a set of active hedge fundsthat represents the hedge fund industry. For example, the filteringprocess 204 excludes, among other things, duplicate listings, fundswhich have ceased operations, and funds that can not be classified inone of the strategies, such as funds of hedge funds. Filtering 204removes a substantial portion of the hedge funds 202 and generates a setof active hedge funds that typically includes about 3,500-5,500 hedgefunds, called index Universe. Each fund in the Universe is categorizedinto one of the strategies 108, 110, 112, 114, 116, 118, 120, 122, and124, allowing to calculate the proportion of asset under management ofthe index Universe allocated to each particular strategy and use thesepercentages to determine target fund numbers as described above.

The index Universe is filtered 206 against a subset of eligibilitycriteria 207, described below. This preliminary filtering produces amore manageable set of funds (referred to as index Candidates) that canbe investigated in more details, including verification andclarification of the available information, as well as for collectingadditional information that was missing in the original database.

The set of index Candidate funds is then filtered 208 against the fullset of eligibility criteria 212. The eligibility criteria 212 includesfund specific criteria used reduce the index Universe into a smaller setof eligible funds that meet the limitations set by the fundadministrator for the hedge fund index.

The set of eligible funds is used to construct 210 the hedge fund indexaccording to a rule set 214. The rule set 214 includes rules andguidelines for selecting a subset of the eligible funds for inclusion inthe hedge fund index (as described below).

An exemplary set of eligibility criteria 212 for filtering the set ofactive hedge funds to generate a set of eligible funds is shown in table1 below: TABLE 1 Rule 1 The fund has an actual performance history forat least the preceding 6 months. Rule 2 The fund is domiciled outsidethe United States. Rule 3 The fund issues a US $ denominated class. Rule4 The fund has at least US $25 million in assets under management (withrespect to a particular fund as opposed to the management company). Rule5 The fund requires a minimum initial investment amount no greater thanUS $250,000, a minimum subsequent investment amount no greater than US$50,000, and minimum redemption amount no greater than US $50,000 (otheramounts are possible and the dollar amount limits can be relaxed at thediscretion of the index administrator). Rule 6 The fund acceptssubscriptions no less frequently than monthly as of the last or firstbusiness day of a month, subject to exception in the discretion of theindex administrator. Rule 7 The fund does not charge subscription fees.Rule 8 The fund accepts redemptions no less frequently than annually asof the last or first business day of a month. Rule 9 The redemptions arenot in suspension. Rule 10 The fund has not informed its investors thatit is intending to cease operations. Rule 11 The fund requires no morethan 65 calendar days notice for redemptions. Rule 12 The fund does nothave a lock-up period greater than 1 year. Rule 13 The fund does not“gate” (i.e., limit) the amount of redemptions that a single investorcan make over a particular time period (i.e., funds which have the rightto limit redemptions across the entire fund may qualify, funds whichhave the right to limit the redemptions of a single investor would notqualify). Rule 14 The fund does not charge redemption fees after 1 yearfrom the date of each investment. Rule 15 The fund offers investmentseligible to restricted persons for purposes of “new issues” as definedin NASD Rule 2790. Rule 16 None of the fund, its management company orany of their affiliates or associated persons are known to the indexadministrator to be under investigation or review by a regulatory bodyor other authority for reasons of wrongdoing, breach of any law,regulation, rule, or any other reason that is likely to be materiallyadverse to the fund as determined by the index administrator. Rule 17The fund can be categorized by the index administrator into one of thestrategy. Rule 18 The index administrator is able to obtain the datanecessary on the fund for purposes of maintaining the index. Rule 19 Thefund would accept an investment by the index administrator or itsaffiliates with respect to the index. Rule 20 The fund satisfies theindex administrator's Fund Review.

Some or all of the rules described above can be used to filter the setof index Universe funds to provide the set of eligible funds. Additionalrules can also be used to filter the set of index Universe funds. Thatis, other implementations of the filtering process can includeadditional filtering rules not shown or can include a subset of lessthan all of the rules shown above.

In general, process 208 includes reviewing information about aparticular hedge fund and determining if the fund meets the eligibilitycriteria defined by the set of rules. If the fund does not meet theeligibility criteria, the fund is removed from the set of eligiblefunds. In determining whether a fund satisfies the eligibility criteria212, the index administrator uses available information relevant and/ormaterial to making its determinations. Such information may include, butis not limited to, the organizational documents of the fund andagreements between the fund and the index administrator or itsaffiliates.

In the event there are multiple funds or multiple classes or series ofshares of a fund that are similar in terms of investment managementand/or investment strategy, the index administrator may select one fundor a blend of these funds, classes, or series to represent the eligiblefund.

If desired, in addition to filtering the funds against eligibilitycriteria, the funds included in the set of eligible funds can bereviewed by an index administrator. During the fund review, the indexadministrator confirms the appropriate Strategy categorization of afund. The index administrator can also exclude funds that do not have anappropriate infrastructure or exhibit other features that indicate asignificant potential for an unacceptable level of non-investmentrelated losses. While the funds review allows the index administratorflexibility to exclude certain funds, the fund review is not used toassess whether a particular hedge fund will generate superior returnsversus other hedge funds or to exclude poor performing funds from thehedge fund index. The fund review may involve consideration of, amongother things, the fund's documentation, investment strategy, auditedfinancial statements, background of index providers (which may includereference and background checks) and operations. In some embodiments,on-site meetings may be conducted as part of the fund review. The indexadministrator may conduct follow-up fund reviews to ensure, among otherthings, that the fund's strategy classification in a particular strategyremains accurate.

Selecting Index Funds

Referring to FIG. 10, a process 220 for selecting a subset of theeligible hedge funds to include in the hedge fund index is shown. Theset of eligible hedge funds is determined 222 using a rules basedprocess as described above. The eligible funds in each strategy areranked 226 based on the total assets under management for the hedge fund(e.g., ranked from highest to lowest). The hedge funds included thehedge fund index are selected 228 based on assets under management (AUM)rankings. For example, the funds with the highest value of assets undermanagement for each strategy can be selected for the index. The numberof funds selected for each strategy is dependent on the target fundnumber for the particular strategy (as described above).

For example, if the target fund number for a given strategy istwenty-five, and the number of eligible funds in the strategy is equalor greater than twenty-five, then the twenty-five eligible hedge fundsfor the strategy with the highest AUM amount will be selected torepresent that strategy.

The list of index funds can change with time due to changes ineligibility of the index funds. For example, a fund may cease operationsand, consequently, be removed from the index. If during any rebalancingperiod the number of funds in the index for a particular strategy isless than the target fund number for this group, the index administratormay add additional eligible funds from the this strategy to the hedgefund index, provided that the actual weight of the strategy is below thetarget strategy weight and that other conditions related to thereallocation adjustments (described below) are met.

That is, the additional eligible funds can be selected to represent theStrategy, in order of AUM from highest to lowest, until the targetnumber of funds is achieved. If even after the target number of funds isachieved, the target strategy weight still can not be achieved, indexadministrator may continue to add additional eligible funds from thethis strategy to the hedge fund index until either the target strategyweight is achieved or there are no eligible funds left. In the event thetotal capacity of index funds is insufficient to achieve the targetstrategy weight and there are no eligible funds left, the shortfall isreallocated on a pro-rata basis across the other strategies, subject tothe strategy weight caps. Therefore, the strategy weight for theStrategy having the shortfall will be lower, whereas the strategyweights for the other strategies will be higher.

While the process for selecting funds to include in the index shown inFIG. 10 includes selecting the funds with the highest AUM, otherselection processes and additional criteria can be used. For example,the index administrator may limit the number of index funds managed bythe same management entity (or its affiliates). For example, the indexadministrator can set a limit such that no more than five funds in thehedge fund index are managed by the same management entity.

Fund and Strategy Weights

Depending on a particular implementation each fund in the index may beweighted equally to the extent possible or each fund in a strategy maybe weighted equal to the extent possible or the weights to each fund inthe index and/or in a strategy may be assigned based on other criteria,such as AUM. For example, if each fund in the index is weighted equallyto the extent possible and if the hedge fund index includes 100 hedgefunds and the capacity limit for all funds exceeds 1% of the indexNotional Amount, each hedge fund would be allocated a weight of 1%.

In general, the weighs of the individual hedge funds included in thehedge fund index is limited by a fund redemption thresholds and a fundweight floor (as described below).

The strategy weight for a particular strategy is calculated as the sumof the fund weights of the index funds included in the strategy. Thestrategy weight for each of the strategies may be limited by a maximumpermissible strategy weight referred to as a “strategy weight cap.”

While initial weights of index funds of the index funds may be setaccording to the index rules, the fund weights will change over time,leading to corresponding changes in strategy weights. The value for aparticular strategy weight cap is set based on the target strategyweight for the particular strategy. For example, the strategy weight capcan be equal to 120% of the respective target strategy weight. Thestrategy weight cap can be set to other percentages (e.g., 110%, 115%,125%, 130) of the strategy weight as desired.

Index Rebalancing

For each rebalancing period, the index administrator determinesadjustments to the weights of individual hedge funds in the index. Theseadjustments correct breaches of the fund redemption thresholds and thestrategy weight caps and adjust the index for changes in the indexnotional amount. Adjustments are generally categorized as increaseadjustments and decrease adjustments. Assuming no changes in the indexNotional Amount, increase adjustments involve an increase to the weightof a particular hedge fund in the index. Addition of a new fund to thehedge fund index is often viewed as a special case of an increaseadjustment. Decrease adjustments involve a decrease to the weight of aparticular hedge fund in the hedge fund index. A complete removal of anindex fund from the index is often considered a specific case of adecrease adjustment.

Adjustments made to the hedge fund index may be determined on a regular,predetermined basis, e.g., during the last week of each month. Thesedates are referred to as calculation dates of the adjustments. A part ofdetermination of an adjustment is determination of the day when theadjustment starts to affect the performance of the index, e.g., on thefirst business day of some future period. These dates are referred to aseffective dates of the adjustments.

In some embodiments adjustments are calculated on a regular basis, e.g.,5 days prior to the end of each month or quarter. In other embodimentsadjustments are calculated only when certain conditions are met.Examples of such condition include ceasing of operations by one or moreindex funds, breach of a fund redemption threshold, etc. In any case,determination of sizes and effective dates of adjustments is forwardlooking in nature. In some embodiments, retroactive changes to theadjustment may be either completely prohibited by the index rules, or atleast limited to specific and unusual circumstances. In other words, anadjustment determination date typically precedes the adjustmenteffective date.

On each adjustment determination date sizes of adjustments and thecorresponding effective dates are determined for one or more futureperiods. The number of the future periods (adjustment horizon) istypically determined by the liquidity provisions of the index funds. Forexample, in some embodiments, increase adjustments are determined onlyfor the next occurring month, because an investment in hedge fundtypically requires only several days and can be executed in the hedge bythe beginning of the next occurring month.

On the other hand, a decrease adjustment for a fund that requires 90days notice must be planned at least 3 months ahead, i.e., it requiresthe adjustment horizon to be at least 3 months. In general, depending onthe liquidity provisions of the index fund, the adjustment horizon fordecrease adjustments can be for up to several years in the future.

Adjustment Determination Process

Referring to FIG. 11, while adjustments can be generally categorized asincrease adjustments or decrease adjustments, three adjustment processes250, 252, and 254 are used to adjust the weights of the funds in thehedge fund index. The adjustment processes include a fund weightadjustment process 250, a strategy weight adjustment process 252, and areallocation adjustment process 254. The index administrator determinesnew or revised weights for the funds in the hedge fund index based onadjustment processes 250, 252, and 254, which are performed insuccession.

The adjustment processes 250, 252, and 254 are used to adjust the fundweights based on changes to the index notional amount, changes to theCapacity Limits, and changes in performance of the fund relative to allother funds in the index In general, the fund weight adjustment processis used to adjust the weights of funds so that all fund weights arewithin the desired range. The strategy weight adjustment process 252 isused to adjust the weights of strategies so that all strategy weightsare within a desired range.

The determination of specific values for fund and strategy weightadjustments is based on projected fund weights (e.g., the estimatedweight of the fund after taking into account changes in index notionalamount, outstanding adjustments and residual weights defined below).

In some implementations, all fund and strategy weight adjustments aredecrease adjustments and the amount redeemed from an index fund becomesimmediately available for reallocation to other index funds. In otherimplementations the amount redeemed from an index fund becomes availablefor reallocation only after a pre-determined delay period. During suchdelay period the redeemed amount is called the residual amount andcorresponding weight is called the residual weight. The index rulestypically specify the return earned by the residual weights, forexample, residual weights may earn zero returns.

In general, in the result of the fund and strategy weight adjustmentsthe sum of projected fund weights will not equal to 100%. Thereallocation adjustment process 254 is used to reallocate weights insuch a way such that a sum of the projected weights and residual weightsfor the funds in the hedge fund index is as close as possible to 100%.

Referring to FIG. 12, an index adjustment process 260 that includes afund weight adjustment process 250, a strategy weight adjustment process252, and a reallocation adjustment process 254 is shown. Adjustmentprocess 260 includes calculating a projected fund weight for each fundin the hedge fund index based on changes in the index notional amount,fund performance, and any outstanding adjustments. The projected fundweight estimates the weight of each hedge fund included in the hedgefund index for a particular month. Calculation of the projected fundweight is described in detail below. Based on the projected fundweights, fund weight adjustments are determined 264 based on the maximumfund weight values (e.g., fund redemption thresholds or weight caps) andthe minimum fund weight values (e.g., fund weight floors) for each hedgefund in the hedge fund index (e.g., as shown in FIGS. 13A and 13B).Subsequent to calculating the fund weight adjustments, the projectedfund weights are re-calculated 266 for each fund in the hedge fund indextaking into account the fund weight adjustments from fund weightadjustment process 250. Based on the re-calculated projected fundweights, projected strategy weights for each strategy are calculated 268and strategy weight adjustments are determined 270 based on maximumstrategy weight values (e.g., as described below in FIG. 14).

After calculating the strategy weight adjustments, the projected fundweights for each fund are re-calculated 272 taking into account thestrategy weight adjustments. Subsequently, reallocation adjustments aredetermined 274. The re-allocation adjustments are used to adjust weightsof various hedge funds in the index, add funds to the index, or deletefunds from the hedge fund index such that a sum of the projected fundweights for all of the funds included in the hedge fund index is equalto or at least about 100%.

As described above, the fund weight adjustment process 250 includesdetermining adjustments to the fund weights of particular funds in thehedge fund index based on fund redemption thresholds (e.g., maximum fundweight values).

FIGS. 13A and 13B show an exemplary fund weight adjustment process 250.Fund weight adjustment process 250 can be completed for the funds in thehedge fund index on a predetermined basis (e.g., monthly, weekly,quarterly). In order to ensure that the funds in the hedge fund indexsatisfy the rules used to initially select the funds, the informationabout a particular fund is reviewed to determine 280 if the hedge fundsatisfies the eligibility criteria outlined in the rules. If the fundfails to satisfy the eligibility criteria, the fund is examined in moredetail to determine 282 if the fund should remain in the hedge fundindex for other reasons, such as liquidity limits and redemption fees.If there are not additional reasons to maintain the fund in the index,the capacity of the fund is set 286 to zero, effectively removing thefund from the hedge fund index.

If the fund either satisfies the eligibility criteria or if there areother reasons that the fund should remain in the index, the projectedfund weight is calculated 284 for the particular fund. In doing so,various factors are taken into consideration including the fund weightat the end of the prior month, the residual weight of each index fund,the estimated index notional amount used at the time when theadjustments were determined, and an estimate of the index notionalamount based on the most recent information available at the time of thecalculation.

In one embodiment, the projected weight of each index fund is determinedusing the following formula:${pfw}_{m,n}^{b} = {{( {{efw}_{{m - 1},n}^{b} - \varpi_{{m - 1},n}^{b}} ){\eta_{{m - 1},n}^{b}/\eta_{m,n}^{b}}} + {\sum\limits_{k = 1}^{n}{\alpha_{m,k}{\eta_{m,k}^{b}/\eta_{m,n}^{b}}}}}$

Where n is the current month, where n<m, pfw_(m,n) ^(b) is the ProjectedFund Weight of an index Fund at the beginning of Target Month m asdetermined in current month n, efw_(m-1,n) ^(b) is the estimated FundWeight of an index Fund at the beginning of month m−1 determined duringthe current month n by the index Administrator based on the latestavailable information, ω _(m-1,n) ^(b) is the Residual Weight of anindex Fund at the beginning of month m−1 determined during the currentmonth n, η_(m,n) ^(b) is the estimated index Notional Amount at thebeginning of Target Month m determined during the current month n by theindex Administrator based on the latest available information, α_(m,k)is an Adjustment determined during a month k with an Effective Date asof the beginning of Target Month m. Returns for future months areassumed to be zero and on the index Inception Date m=1, n=0 andpfw_(1,0) ^(b)=0, ω _(0,0) ^(b)=0.

In one implementation, the fund weight is calculated for a particularhedge fund using the following formula:ω_(m) ^(e)=ω_(m) ^(b)(1+ρ_(m))/(1+κ_(m))

where ω_(m) ^(e) is the fund weight at the end of month m, ω_(m) ^(b) isthe fund weight at the beginning of the month m, ρ_(m) is the net returnof the hedge fund for the month m, and κ_(m) is the hedge fund indexreturn for month m as defined below.

In one embodiment, the preliminary weight of each index fund isdetermined using the following formula:$\phi_{m}^{b} = {{( {\omega_{m - 1}^{e} - _{m - 1}^{e}} ){\eta_{m - 1}^{e}/\eta_{m}^{b}}} + {\sum\limits_{k = 1}^{m - 1}( {a_{m,k}{\eta_{m,k}^{b}/\eta_{m}^{b}}} )} + \delta_{m}^{b}}$

where φ_(m) ^(b) is the preliminary weight of an index fund at thebeginning of the target month m, ζ_(m-1) ^(e) is the amount of theresidual weight of the index fund at the end of month m−1 that is to bereallocated at the beginning of month m, η_(m-1) ^(e) is the indexnotional amount at the end of the month m−1, η_(m) ^(b) is the indexnotional amount at the beginning of month m, α_(m,k) is the amount of anadjustment determined during the month k for the month m, where k<m,η_(k,m) ^(b) is the index notional amount estimated during the month kfor the beginning of the target month m, and δ_(m) ^(b) is the amount ofthe residual weight of the index fund which becomes outstanding at thebeginning of target month m.

In general, after the completion of fund and strategy weight adjustmentsthe sum of the projected weights and residual amounts will usually begreater than or less than 100% due to changes in the index notionalamount and residual weights becoming available for reallocation.

Fund Redemption Threshold and Fund Floor

Referring back to FIGS. 13A and 13B, prior to calculating the fundadjustments, index administrator calculates maximum and minimum fundweights for each fund on the effective date of the adjustments.

First, a ratio of the capacity over the index notional amount iscalculated 288. The capacity is the dollar amount determined by theindex administrator that is equal to the amount that the indexadministrator or its affiliates can allocate to the index fund on theeffective date of the adjustment. The index notional amount refers tothe net dollar exposure of the index provider to the hedge fund index.Then the process determines 292 if the calculated ratio of the capacityover the index notional amount is less than the fund redemptionthreshold specified by the rules. If the ratio is less than theredemption threshold specified by the rules, then the process sets 294the maximum fund weight equal to the calculated ratio. Otherwise theprocess sets 294 the maximum fund weight equal to the fund redemptionthreshold.

Then the process determines 298 if the particular fund acceptinvestments or additional investments from the index administrator. Ifthe fund would accept additional investments from the indexadministrator, the fund weight floor is set 296 to a ratio of therequisite exposure amount (described below) over the index notionalamount. If the index fund would not accept additional investments fromthe index administrator, the index administrator sets 296 the fundweight floor equal to the ratio of the amount of investment the indexadministrator already has in the index fund over the index notionalamount.

Requisite exposure amount refers to the minimum amount of exposure theindex administrator must maintain in the index fund as a result of theredemption policies of the fund or other factors on the effective dateof the adjustment. In order to minimize unnecessary charges to theindex, the process 251 allows to eliminate redemptions from certainhedge funds that have redemption fees by setting the fund weight floorat the minimum level that does not trigger the redemption fees.

Subsequent to setting both the redemption threshold and the fund weightfloor for a particular fund, the index administrator determines 302 ifthe fund weight floor is greater than the redemption threshold. If thefund weight floor is greater than the fund redemption threshold, thenthe fund weight floor and fund redemption threshold are both set 304 tothe same value. For example, the value of the fund redemption thresholdand fund weight floor can be set to be equal to the fund weight ininstances where the fund weight floor is a function of the requisiteexposure amount as described above. In cases where the fund weight flooris not a function of the requisite exposure amount the fund weight floorcan be set equal to the fund redemption threshold.

Fund Weight Adjustments

Upon determination of the projected fund weights, the indexadministrator performs the fund weight adjustments, e.g., the indexadministrator determines if the projected fund weight (e.g., ascalculated in 284) exceeds the fund redemption threshold. If theprojected fund weight exceeds the redemption threshold, the indexadministrator makes fund weight adjustments 310 such that the resultingprojected fund weight will be reduced, for example, to the greater of(i) the fund weight floor and (ii) approximately 75% of the fundredemption threshold.

Strategy Weight Adjustments

Referring back to FIG. 11, subsequent to determining the fund weightadjustments, the index administrator recalculates the projected fundweights to reflect the fund weight adjustments and calculates strategyadjustments for the funds in the index.

Referring to FIG. 14, an exemplary strategy weight adjustment process320 is shown. The process 320 determines 322 a projected strategy weightfor one of the strategies. The projected strategy weight can becalculated as the sum of the projected fund weights of all index fundsin the strategy. Upon determination of the projected strategy weights,the process 320 compares 324 the calculated strategy weight to thetarget strategy weight for the strategy to determine what, if any,adjustments need to be made to correct instances where a projectedstrategy weight exceeds a strategy weight cap. If the calculatedstrategy weight is greater than the target strategy weight cap, then theprocess 320 adjusts 330 the projected strategy weight such that theprojected strategy weight is reduced to approximately the targetstrategy weight. The adjustment of the projected strategy weight isaccomplished by making adjustments to one or more of the index funds inthe strategy. The selection of the specific funds to be adjusted and thespecific amounts of corresponding fund adjustments can be accomplishedusing multiple methods. For example, the process 320 adjusts the fundweights of the index funds in the strategy in a manner that results inthe highest projected fund weight being as low as possible, subject tothe fund weight floors.

Reallocation Adjustments

Referring back to FIG. 12, subsequent to determining the fund weightadjustments and the strategy weight adjustments, the index administratorrecalculates the projected fund weights to include these adjustments anddetermines the adjustments that need to be made such that the sum of theprojected weights and residual weights is maintained at about 100%.Referring to FIG. 15, a reallocation adjustment process 340 fordetermining the adjustments that need to be made such that the sum ofthe projected weights is maintained at or near 100% is shown. Thereallocation adjustment process 340 recalculates the projected fundweights to include the strategy weight adjustments and determines 342 asum of the projected weights for the hedge funds included in the hedgefund index. The reallocation adjustment process 340 determines 344 aaggregate reallocation weight based on the sum of the projected weightsand residual weights. For example, the reallocation weight can becalculated by taking 100% minus the sum of the projected weights andresidual weights. Thus, the aggregate reallocation weight is theaggregate weight to be reallocated for a given effective date. Theaggregate reallocation weight for each index fund for a month can bedetermined using the following formula:${arw}_{m} = {1 - {\sum\limits_{f = 1}^{x}{pfw}_{m}^{bf}} - {\sum\limits_{f = 1}^{x}{rw}_{m}^{f}}}$

where arw_(m) is the aggregate reallocation weight for month m, x is thenumber of index funds in the index for the month immediately precedingmonth m, pfw_(m) ^(bf) is the projected fund weight of index fund f atthe beginning of month m, and rw_(m) ^(f) is the residual weight ofindex fund f for month m Subsequent to calculating the reallocationweight, the reallocation adjustment process 340 determines 348 the signof the aggregate reallocation. If the aggregate reallocation weight ispositive, the reallocation adjustment process 340 makes increaseadjustments 350 to increase the projected fund weight of at least someof the index funds in an aggregate amount about equal to the aggregatereallocation weight. The increase reallocation adjustments can be madeaccording to a set of predetermined rules. For example, the aggregatereallocation weight can be reallocated among the strategies in a mannerthat results in the lowest (negative) value of the difference betweenthe projected strategy weight less the target strategy weight across allstrategies being as high as possible. For example, in this case, theaggregate reallocation weight is allocated to the most underweightedstrategy or strategies in the index. In the event one or more increaseadjustment needs to be made to funds in a strategy and the actual numberof index funds representing a strategy is less than the target fundnumber, the index administrator introduces additional eligible funds torepresent the strategy such that the target fund number of funds areincluded in the hedge fund index for the strategy. When reallocatingamong index funds within a given strategy, reallocation adjustments canbe made in a manner that results in the lowest projected fund weight inthe strategy being as high as possible, subject to the fund weight caps,e.g., increase adjustments are made to the most underweighted fundswithin the strategy.

Regardless of how many index funds represent the strategy in the index,in the event the reallocation adjustments cannot be fully allocated tothe index funds previously included in the strategy, the indexadministrator introduces additional eligible funds to represent thestrategy such that the reallocation adjustments can be made to thatstrategy. If an insufficient number of additional eligible funds existsfor a given strategy to fully allocate the reallocation adjustments, theexcess reallocation adjustment amount is allocated across the otherstrategies.

If the index administrator determines 348 that the aggregatereallocation weight is negative, then decrease adjustments are made 346to decrease the projected fund weight of certain hedge funds in anaggregate amount equal to the aggregate reallocation weight. Thedecrease reallocation adjustments are made according to a set ofpredetermined rules. For example, the aggregate reallocation weight canbe allocated among strategies in a manner that results in the highestvalue between the projected strategy weight less the target strategyweight across all Strategies being as low as possible, e.g., decreaseadjustments are made to the most overweighted strategy or strategies.Within a given strategy, the index administrator may make reallocationadjustments in a manner resulting in the highest projected fund weightin the strategy being as low as possible, subject to the fund weightfloors, e.g., reducing the weight of the most overweighted fund orfunds. In some cases, due to the fund weight floors, in order to achievethe desired strategy weight it may be necessary to remove one or morefunds from the hedge fund index.

The effective date of each such adjustment, including the completeremoval of an index fund from the index, can be set in accordance withthe liquidity provisions of the corresponding index fund.

Normalization of Weights

The determination of all index adjustments is based on the estimatedweights of the index funds on the effective date of each adjustments.Given that the adjustment effective date is a future date relative tothe adjustment determination date, these estimates are typicallyimprecise and based on the preliminary information available to theindex administrator at the determination date. As a result, when indexlevel and index return are calculated based on the actual performanceinformation obtained from the index funds, the sum of the fund weightsfor all of the index funds will not be equal to 100%. In order tocorrect this, in the process of index calculations the fund weights maybe normalized in such a way that a sum of the fund weights used incalculations is equal to or about equal to 100%. One of the way toachieve this is to multiply all fund weights on a normalizationcoefficient determined in accordance with the following formula:$\gamma_{m} = {1/{\sum\limits_{f = 1}^{x}\phi_{m}^{bf}}}$

Where γ_(m) is a normalization coefficient for the period m, x is thenumber of index funds in the index for the period m, f is an index fundand φ_(m) ^(bf) is the preliminary weight of the index fund resultingfrom taking into account actual performance of the fund and alladjustments with effective dates less or equal to the beginning of theperiod m.

Thus, when the index level and return are calculated for a particularperiod, the weight of each index Fund at the beginning of each period isequal to the product of the normalization coefficient and thepreliminary weight as follows:ω_(m) ^(b)=γ_(,)φ_(m) ^(b)Index Level

In addition to calculating the hedge fund weights and making adjustmentsto the weights and calculating index returns, the index administratordetermines and publishes an index level. The index level isrepresentative of the value of the index at a particular time.Initially, the index level is set to an initial level, e.g., 100. Thislevel is subsequently adjusted based on the performance of the hedgefunds in the hedge fund index. The administrator may report anintra-month estimate of the index level, a preliminary index level, anda final index level. This intra-month estimate of the index level isdetermined by the index administrator based upon performance estimatesreceived from index funds during the month. A preliminary estimate ofthe index level for the end of each month will be determined on or aboutthe 15^(th) calendar day following a month end. It is not a requirementof index funds to report intra-month and preliminary performanceestimates, and therefore, intra-month estimates and preliminaryestimates are provided for informational purposes only. This preliminaryindex level may be revised, based on updated performance data for theindex funds, until determination of the final index level. The indexadministrator determines the official index level for the end of eachmonth on or about the 45^(th) calendar day following the end of themonth, regardless of whether final information have been actuallyreceived. Once a final index level is determined, it is not be revised.

To determine the index level, the index administrator multiplies theindex level at the beginning of the month by one plus the month-to-datereturn of the Hedge fund index. For example, the index administratorcalculates the index level according to the following formula:λ_(m) ^(e)=λ_(m) ^(b)(1+κ_(m))

where λ_(m) ^(e) is the index level at the end of month m, λ_(m) ^(b) isthe index level at the beginning of month m, κ_(m) is the index returnfor month m calculated as the weighted average return of all indexfunds. The index return is calculated according to the followingformula:$\kappa_{m} = {{\sum\limits_{f = 1}^{x}{\rho_{m}^{f}\omega_{m}^{bf}}} - \varphi_{m}}$

where x is the number of index funds in the hedge fund index duringmonth m, ρ_(m) ^(f) is the net return of index fund f during month m,ω_(m) ^(bf) is the fund weight of index fund f at the beginning of monthm, and φ_(m) is the index administration fee for month m. In someembodiments, the return of the hedge fund index for a given month willbe adjusted by the index administrator to deduct an index administrationfee. For example, the index administration fee can be about 0.06667%(0.80% per annum) of the index Level at the end of that month foradministration of the index.

Net Returns of index Funds

In calculating the index level, the index administrator determines thenet return of each hedge fund ρ_(m) ^(f) in the index by referencing themost recent return information available that reflects the change in netasset value of the hedge fund. Return information can be provided by thehedge fund, its administrator, or its investment manager, or othersources of data available to the index administrator, includingstatements relating to actual investments held by itself or itsaffiliates. If a hedge fund has multiple share classes or series, theindex administrator determines which share class or series to referenceor may reference a blend of the various classes and series. In theabsence of return data, the index administrator may arrive at its ownestimate. The index administrator may make modifications to the returndata when determining at the net return as described below. The indexadministrator modifies the return data to better reflect the value ofthe hedge fund. For example, the index administrator may modify the dataif the fund has suspended or is otherwise limiting redemptions. Theindex administrator may also modify the return data if there issufficient reason to believe the return data is inaccurate and/or tocorrect for errors or restatements in valuations from prior months. Forreductions in the weight of an index fund, the net return of such fundmay include redemption fees as prescribed in the hedge fund's offeringdocuments or elsewhere. The net return will reflect the weighted averageredemption charge, if any, which would be payable upon a full or partialredemption from such fund. To the extent such reduction in weight is theresult of a reduction in the index notional amount, no redemptioncharges will be included in the determination of net return. To theextent that a fund weight includes a residual allocation, the net returnwill be modified on a weighted average basis to reflect the zero returnattributed to such residual allocation. In some cases the net returndetermined by the index administrator may differ substantially from thereturn data provided by the fund.

Structured Products

Referring to FIG. 16, a process 370 for buying and selling productsrelated to the hedge fund index is shown. Process 370 includes offeringfor sale options based on the index. In general, the options are tied tothe index level and gains/losses are calculated relative to the indexlevel. If an investor desires to invest obtain economic exposure thehedge fund index, the investor purchases 372 an index-linked structuredproduct, e.g., an option, a swap or a structured note from the indexprovider. When the investor purchases, for example, an options, theinvestor enters in a contract with a index provider. The contracttypically specifies, among other things, a strike price, an expirationdate and acceptable levels of leverage. For example, the strike pricecan be related to the index level on the day the options are purchased.While the investor holds the options, process 370 periodicallycalculates 378 a valuation for the option based on a comparison of thecurrent index level 376 of the hedge fund index to the strike price ofthe options. After the index level at the expiration date of the optionis finalized, process 370 performs 380 a final valuation of the option.Based on the final value calculation, the index administrator pays 382 asettlement to the buyer (if applicable).

Other embodiments are within the scope of the claims.

1. A method comprising: providing an index representing a plurality ofhedge funds, each of the plurality of hedge funds having an associatedweight; determining a capacity limit for a particular one of theplurality of hedge funds; and adjusting an associated weight in theindex for the particular one of the plurality of hedge funds based onthe determined capacity limit.
 2. The method of claim 1 wherein thecapacity limit is a maximum amount that can be invested in the hedgefund; and adjusting the weight for a particular one of the hedge fundsis based on the determined maximum amount that can be invested in thehedge fund.
 3. The method of claim 1 wherein the capacity limit is amaximum amount that can be redeemed from the hedge fund; and adjustingthe weight for a particular one of the hedge funds is based on thedetermined maximum amount that can be redeemed from the hedge fund.
 4. Amethod comprising: providing an index representing a plurality of hedgefunds, each of the plurality of hedge funds having an associated weight;determining a capacity limit for a particular one of the plurality ofhedge funds based on a maximum amount that can be invested in the hedgefund; and adjusting an associated weight in the index for the particularone of the plurality of hedge funds based on the determined capacitylimit.
 5. The method of claim 4, wherein the maximum amount that can beallocated to the hedge fund according the set of predetermined rules isbased on the maximum amount that the hedge fund is willing to accept. 6.The method of claim 5, wherein the maximum amount that can be allocatedto the hedge fund according the set of predetermined rules is based onthe maximum amount that the index provider can invest in the hedge fundbased on risk management limitations of the index provider.
 7. Themethod of claim 8, wherein the maximum amount that can be invested inthe hedge fund according the set of predetermined rules is based on themaximum amount that the index provider can allocate to the hedge fundbased on regulatory limitations, contractual limitations or fiduciaryresponsibilities.
 8. A method comprising: providing an indexrepresenting a plurality of hedge funds, each of the plurality of hedgefunds having an associated weight; estimating a capacity limit for aparticular one of the plurality of hedge funds based on a maximum amountthat can be redeemed from the hedge fund; and adjusting the weight for aparticular one of the hedge funds based on the estimate of the maximumamount that can be redeemed from the hedge fund.
 9. The method of claim8, wherein adjusting the associated weight for the particular one of theplurality of hedge funds further comprises adjusting the weight based onan estimate of the date at which a redemption is allowed.
 10. The methodof claim 8, wherein adjusting the associated weight for the particularone of the plurality of hedge funds further comprises adjusting theweight based on an estimate of the redemption notice period prescribedby the hedge fund.
 11. A computer program product, tangibly embodied inan information carrier, for executing instructions on a processor, thecomputer program product being operable to cause a machine to: providean index representing a plurality of hedge funds, each of the pluralityof hedge funds having an associated weight; determine a capacity limitfor a particular one of the plurality of hedge funds based on a maximumamount that can be invested in the hedge fund; and adjust an associatedweight in the index for the particular one of the plurality of hedgefunds based on the determined capacity limit.
 12. The computer programproduct of claim 11, wherein the maximum amount that can be allocated tothe hedge fund according the set of predetermined rules is based on themaximum amount that the hedge fund is willing to accept.
 13. Thecomputer program product of claim 11, wherein the maximum amount thatcan be allocated to the hedge fund according the set of predeterminedrules is based on the maximum amount that the index provider can investin the hedge fund based on risk management limitations of the indexprovider.
 14. The computer program product of claim 11, wherein themaximum amount that can be invested in the hedge fund according the setof predetermined rules is based on the maximum amount that the indexprovider can allocate to the hedge fund based on regulatory limitations,contractual limitations or fiduciary responsibilities.
 15. A computerprogram product, tangibly embodied in an information carrier, forexecuting instructions on a processor, the computer program productbeing operable to cause a machine to: provide an index representing aplurality of hedge funds, each of the plurality of hedge funds having anassociated weight; estimate a capacity limit for a particular one of theplurality of hedge funds based on a maximum amount that can be redeemedfrom the hedge fund; and adjust the weight for a particular one of thehedge funds based on the estimate of the maximum amount that can beredeemed from the hedge fund.
 16. The computer program product of claim15, wherein the instructions to cause the machine to adjust theassociated weight for the particular one of the plurality of hedge fundscomprise instructions to cause the machine to adjust the weight based onan estimate of the date at which a redemption is allowed.
 17. Thecomputer program product of claim 15, wherein the instructions to causethe machine to adjust the associated weight for the particular one ofthe plurality of hedge funds comprise instructions to cause the machineto adjust the weight based on an estimate of the redemption noticeperiod prescribed by the hedge fund.
 18. A system configured to: providean index representing a plurality of hedge funds, each of the pluralityof hedge funds having an associated weight; determine a capacity limitfor a particular one of the plurality of hedge funds based on a maximumamount that can be invested in the hedge fund; and adjust an associatedweight in the index for the particular one of the plurality of hedgefunds based on the determined capacity limit.
 19. The system of claim18, wherein the maximum amount that can be allocated to the hedge fundaccording the set of predetermined rules is based on the maximum amountthat the hedge fund is willing to accept.
 20. The system of claim 18,wherein the maximum amount that can be allocated to the hedge fundaccording the set of predetermined rules is based on the maximum amountthat the index provider can invest in the hedge fund based on riskmanagement limitations of the index provider.
 21. The system of claim18, wherein the maximum amount that can be invested in the hedge fundaccording the set of predetermined rules is based on the maximum amountthat the index provider can allocate to the hedge fund based onregulatory limitations, contractual limitations or fiduciaryresponsibilities.
 22. A system configured to: provide an indexrepresenting a plurality of hedge funds, each of the plurality of hedgefunds having an associated weight; estimate a capacity limit for aparticular one of the plurality of hedge funds based on a maximum amountthat can be redeemed from the hedge fund; and adjust the weight for aparticular one of the hedge funds based on the estimate of the maximumamount that can be redeemed from the hedge fund.
 23. The computerprogram product of claim 22, wherein the system if further configured toadjust the weight based on an estimate of the date at which a redemptionis allowed.
 24. The computer program product of claim 22, wherein thesystem if further configured to adjust the weight based on an estimateof the redemption notice period prescribed by the hedge fund.